The law authorizes an important tax break for a property owner who collects insurance (or other compensation) for property lost due to fire, theft or condemnation by a governmental authority. Ordinarily, you’re liable for an immediate tax on any excess over the cost basis of your property.
But a special rule permits taxes to be deferred if the proceeds are reinvested in similar property within the deadlines imposed by the IRS for replacement. For the “involuntary conversion” rules to apply, Code Section 1033 mandates that the replacement property has to be “similar or related in service or use” to the property replaced.
Understandably, words like “similar” lend themselves to different interpretations. Also understandable is that the IRS sometimes takes a hard-nosed approach.
Consider, for example, Letter Ruling 8127089. It held that oil paintings aren’t “similar” to lithographs so as to be eligible for involuntary conversion deferral.
The ruling dealt with a request for advice from someone I’ll call Irene Holmes.
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.