Casualty Loss Replacement Period

Technical topics regarding tax preparation.
#1
irc162  
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Client owns a rental condo. Tenant accidentially set it on fire in August, 2018. It was totally destroyed. At the time, T/P basis was $25K. HOA required T/P to pay a $10K deductible before they would begin repair work. T/P's insurance company reimbursed the $10K deductible paid by the taxpayer in 2018. At that time, it was not clear if additional insuarance proceeds would be received. T/P received an additional $9K in 2019, Taxpayer filed election to postpone gain (since additional proceeds were possible) even though, as of the end of 2019, proceeds were less than basis. In 2020, HOA has not started work. HOA and T/P agree that T?P will get his own contractor to do the work. HOA will pay T/P $50K in 2021. When that happens, T/P will have a gain but will use all proceeds to repair/rebuild property.

When does the replacement period end? IRS says it ends two years after the close of the year in which any part of the gain is realized. Since money received in 2018 and 2019 was less than basis,no gain had been realized as of the end of 2019. I am assuming the year gain is first ealized is 2021 (when the $50K will be received). In that case, the replacment period will end at the end of 2023.

Is this correct?
 

#2
Nilodop  
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The law also allows a longer replacement period in some circumstances.
(3) The period referred to in subparagraphs (1) and (2) of this paragraph is the period of time commencing with the date of the disposition of the converted property, or the date of the beginning of the threat or imminence of requisition or condemnation of the converted property, whichever is earlier, and ending 2 years (or, in the case of a disposition occurring before December 31, 1969, 1 year) after the close of the first taxable year in which any part of the gain upon the conversion is realized, or at the close of such later date as may be designated pursuant to an application of the taxpayer.


And a purchase does include construction, but to be within the replacement period, the construction must have happened by the end of the replacement period. See, e.g., RR 55-517, RR 56-243.

Akso see this discussion. viewtopic.php?f=8&t=1653

I think you're correct re the first year gain is realized, unless client is cash method and constructively received the 50k earlier, or the client is accrual method and the 50k has accrued.
 


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