Publication 547 - Casualties,disasters,and Thefts

Table 3. When To Deduct a Loss

Basis of replacement property. You must

reduce the basis of your replacement property

IF you have a loss...

THEN deduct it in the year...

(its cost) by the amount of postponed gain. In

this way, tax on the gain is postponed until you

From a casualty

The loss occurred.

dispose of the replacement property.

In a Presidentially declared

The disaster occurred or the year immediately

Example. A fire destroyed your rental home

disaster area

before the disaster.

that you never lived in. The insurance company

From a theft

The theft was discovered.

reimbursed you $67,000 for the property, which

had an adjusted basis of $62,000. You had a

On a deposit treated as a:

• Casualty

• A reasonable estimate can be made.

gain of $5,000 from the casualty. If you have

• Bad debt

• Deposits are totally worthless.

another rental home constructed for $110,000

• Ordinary loss

• A reasonable estimate can be made.

within the replacement period, you can post-

pone reporting the gain. You will have rein-

vested all the reimbursement (including your

entire gain) in the new rental home. Your basis

Owner-user. If you are an owner-user, simi-

any business is treated as similar or related in

for the new rental home will be $105,000

lar or related in service or use means that re-

service or use to the destroyed property. For

($110,000 cost − $5,000 postponed gain).

placement property must function in the same

more information, see Disaster Area Losses,

way as the property it replaces.

later.

Replacement Period

Example. Your home was destroyed by fire

Controlling interest in a corporation. You

and you invested the insurance proceeds in a

can replace property by acquiring a controlling

To postpone reporting your gain, you must buy

grocery store. Your replacement property is not

interest in a corporation that owns property simi-

replacement property within a specified period

similar or related in service or use to the de-

lar or related in service or use to your damaged,

of time. This is the replacement period.

stroyed property. To be similar or related in

destroyed, or stolen property. You can postpone

The replacement period begins on the date

service or use, your replacement property must

reporting your entire gain if the cost of the stock

your property was damaged, destroyed, or sto-

also be used by you as your home.

that gives you a controlling interest is at least as

len.

much as the amount received (reimbursement)

Main home in disaster area. Special rules

The replacement period ends 2 years after

for your property. You have a controlling interest

apply to replacement property related to the

the close of the first tax year in which any part of

if you own stock having at least 80% of the

damage or destruction of your main home (or its

your gain is realized.

combined voting power of all classes of voting

contents) if located in a federally declared disas-

stock and at least 80% of the total number of

ter area. For more information, see Gains Real-

Example. You are a calendar year tax-

shares of all other classes of stock.

ized on Homes in Disaster Areas in the

payer. While you were on vacation, a valuable

instructions for Form 4684.

piece of antique furniture that cost $2,200 was

Basis adjustment to corporation’s prop-

stolen from your home. You discovered the theft

erty. The basis of property held by the corpo-

Owner-investor. If you are an owner-inves-

when you return home on August 11, 2002. Your

ration at the time you acquired control must be

tor, similar or related in service or use means

insurance company investigated the theft and

reduced by the amount of your postponed gain,

that any replacement property must have a simi-

did not settle your claim until January 3, 2003,

if any. You are not required to reduce the ad-

lar relationship of services or uses to you as the

when they paid you $3,000. You first realized a

justed bases of the corporation’s properties be-

property it replaces. You decide this by deter-

gain from the reimbursement for the theft during

low your adjusted basis in the corporation’s

mining all the following.

2003, so you have until December 31, 2005, to

stock (determined after reduction by the amount

•

of your postponed gain).

replace the property.

Whether the properties are of similar serv-

Allocate this reduction to the following clas-

ice to you.

ses of property in the order shown below.

Main home in disaster area. For your main

•

The nature of the business risks con-

home (or its contents) located in a Presidentially

nected with the properties.

1) Property that is similar or related in service

declared disaster area, the replacement period

or use to the destroyed or stolen property.

•

What the properties demand of you in the

ends 4 years after the close of the first tax year in

way of management, service, and rela-

which any part of your gain is realized. See

2) Depreciable property not reduced in (1).

tions to your tenants.

Disaster Area Losses, later.

3) All other property.

Example. You are a calendar year tax-

If two or more properties fall in the same class,

Example. You owned land and a building

payer. A hurricane destroyed your home in Sep-

allocate the reduction to each property in pro-

you rented to a manufacturing company. The

tember 2002. In December 2002, the insurance

portion to the adjusted bases of all the properties

building was destroyed by fire. During the re-

company paid you $3,000 more than the ad-

in that class. The reduced basis of any single

placement period, you had a new building con-

justed basis of your home. The area in which

property cannot be less than zero.

structed. You rented out the new building for use

your home is located is not a Presidentially de-

as a wholesale grocery warehouse. Because

clared disaster area. You first realized a gain

Main home replaced. If your gain from the

the replacement property is also rental property,

from the reimbursement for the casualty in 2002,

reimbursement you receive because of the de-

the two properties are considered similar or re-

so you have until December 31, 2004, to replace

struction of your main home is more than the

lated in service or use if there is a similarity in all

the property. If your home had been in a Pre-

amount you can exclude from your income (see

the following areas.

sidentially declared disaster area, you would

Main home destroyed under Figuring a Gain,

•

have until December 31, 2006, to replace the

earlier), you can postpone reporting the excess

Your management activities.

property.

gain by buying replacement property that is simi-

•

The amount and kind of services you pro-

lar or related in service or use. To postpone

vide to your tenants.

reporting all the excess gain, the replacement

Property in the New York Liberty Zone. For

•

property must cost at least as much as the

property located in the New York Liberty Zone

The nature of your business risks con-

amount you received because of the destruction

that was damaged or destroyed as a result of the

nected with the properties.

minus the excluded gain.

September 11, 2001, terrorist attacks, the re-

Also, if you postpone reporting any part of

placement period ends 5 years after the close of

Business or income-producing property

located in a Presidentially declared disaster

your gain under these rules, you are treated as

the first tax year in which any part of your gain is

area.

If your destroyed business or

having owned and used the replacement prop-

realized. This 5-year replacement period applies

income-producing property was located in a

erty as your main home for the period you

only if substantially all of the use of the replace-

Presidentially declared disaster area, any tangi-

owned and used the destroyed property as your

ment property is in the City of New York, New

ble replacement property you acquire for use in

main home.

York.

Page 10

Publication 547 - Casualties,disasters,and Thefts - 2002 Page 10

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