Expiration of Replacement Period under Involuntary Conversion Anonymous asked 5 months ago
Expiration of Replacement Period under Involuntary Conversion

My question is about a rental property, if the homeowner chooses to buy a replacement property instead of rebuild. What is the tax consequence if the homeowner is not able to sell the land (where the fire disaster was) before the expiration of the replacement period under involuntary conversion?

1 Answers
Answer for Expiration of Replacement Period under Involuntary Conversion John Trapani Expert answered 5 months ago

Thanks for your question. Here is some advice for investment property (rental) lost in a casualty – disaster.

The improvements are separated from the land. The sale of the residual land may be combined with the proceeds from the insurance and other funds received for the improvements if the taxpayer determines that the residual land is of no further use as investment property. Usually, this means the the cost of rebuilding is not justified based on the post rebuilding value.

Therefore, if the land is sold, the land sale proceeds may be combined with the other proceeds; the cost of the destroyed improvements can be combined with the cost basis of the land and the overall net gain deferred. (If any cost, post-event, have been incurred on the land – debris removal, reconstruction investigation, they are netted against the net land sale proceeds.)

To include the land sale, the sale must be made within the statutory replacement period – including any extensions.