In many parts of the country, property values have increased dramatically. So it’s not uncommon for property to be insured for much more than its original cost or, in the case of a business asset, the cost after adjustment downward for previously claimed depreciation deductions.
But what if, say, a fire destroys a building and the insurance proceeds exceed your cost? Of course, you don’t have a “gain” in the economic sense. Taxes, though, are another story; you do have a gain, just the same as if you’d reaped a profit on the sale of the building.
Ordinarily, you’re dinged for taxes on the gain in the year you receive insurance proceeds that cover the loss of property that’s stolen or damaged or destroyed due to a fire, a flood and the like. Cue Code Section 1033.It allows you to delay the day of reckoning with the IRS on some or all of the gain on insurance reimbursements for a fire or some other event that qualifies as an “involuntary conversion.”
To become eligible for this tax deferral, you must buy (or acquire a controlling interest, i.e. 80 percent, in a corporation that owns) property that’s “similar or related in service or use” to the converted property within the specified deadlines for replacement.
The IRS has ruled that the “similar or related” requirement is satisfied when the taxpayer remodels an existing nearby structure that it already owns.
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.