Involuntary conversion rules and replacement of destroyed property

Abstract

The basic rules that apply to involuntary conversions are straightforward. To defer realized gain under Section 1033, the taxpayer must receive directly or purchase qualifying replacement property or purchase a controlling interest in a corporation that owns qualifying property. A key point to remember is that the taxpayer who owned the property must replace the property. This replacement property must be acquired within the 2-year replacement period (3 years in some cases). If the cost of the property equals or exceeds the proceeds received due to the involuntary conversion, realized gain is deferred by adjusting the basis of the replacement property.