Publication 547 - Casualties,disasters,and Thefts

Business Personal

can exclude, but you buy replacement property,

2) Partnerships in which more than 50% of

Part

you may be able to postpone reporting the ex-

the capital or profits interest is owned by C

cess gain. See Postponement of Gain, later.

corporations.

1. Cost (total

$400,000) . . . . . .

$200,000

3) All others (including individuals, partner-

Reporting a gain. You generally must report

2. Subtract

ships — other than those in (2) — and S

your gain as income in the year you receive the

depreciation . . . . .

24,000

– 0 –

corporations) if the total realized gain for

reimbursement. However, you do not have to

3. Adjusted basis . . .

$176,000

$200,000

the tax year on all destroyed or stolen

report your gain if you meet certain require-

4. FMV before flood

properties on which there are realized

ments and choose to postpone reporting the

(total $380,000) . .

$190,000

gains is more than $100,000.

gain according to the rules explained under

5. FMV after flood

Postponement of Gain, next.

(total $320,000) . .

160,000

For casualties and thefts described in (3) above,

For information on how to report a gain, see

6. Decrease in FMV

gains cannot be offset by any losses when de-

(line 4 − line 5) . . .

How To Report Gains and Losses, later.

$30,000

termining whether the total gain is more than

7. Loss (smaller of line

$100,000. If the property is owned by a partner-

If you have a casualty or theft gain on

3 or line 6) . . . . . .

$30,000

ship, the $100,000 limit applies to the partner-

personal-use property that you choose

8. Subtract insurance

20,000

ship and each partner. If the property is owned

to postpone reporting (as explained

CAUTION

9. Loss after

by an S corporation, the $100,000 limit applies

next) and you also have another casualty or theft

reimbursement . . .

$10,000

to the S corporation and each shareholder.

loss on personal-use property, do not consider

10. Subtract $100 on

the gain you are postponing when figuring your

Exception. This rule does not apply if the

personal-use

casualty or theft loss deduction. See 10% Rule

property . . . . . . .

– 0 –

100

related person acquired the property from an

under Deduction Limits, earlier.

11. Loss after $100 rule

$10,000

$9,900

unrelated person within the period of time al-

12. Subtract 10% of

lowed for replacing the destroyed or stolen prop-

$125,000 AGI on

erty.

Postponement of Gain

personal-use

Related persons. Under this rule, related

property . . . . . . .

– 0 –

12,500

Do not report a gain if you receive reimburse-

persons include, for example, a corporation and

13. Deductible

ment in the form of property similar or related in

an individual who owns more than 50% of its

business loss . . .

$10,000

service or use to the destroyed or stolen prop-

outstanding stock and two partnerships in which

14. Deductible

erty. Your basis in the new property is generally

the same C corporations own more than 50% of

personal loss . . .

– 0 –

the same as your adjusted basis in the property

the capital or profits interests. For more informa-

it replaces.

tion on related persons, see Nondeductible Loss

You must ordinarily report the gain on your

under Sales and Exchanges Between Related

stolen or destroyed property if you receive

Persons in chapter 2 of Publication 544.

Figuring a Gain

money or unlike property as reimbursement.

Death of a taxpayer. If a taxpayer dies after

However, you can choose to postpone reporting

having a gain but before buying replacement

If you receive an insurance payment or other

the gain if you purchase property that is similar

property, the gain must be reported for the year

reimbursement that is more than your adjusted

or related in service or use to the stolen or

in which the decedent realized the gain. The

basis in the destroyed, damaged, or stolen prop-

destroyed property within a specified replace-

executor of the estate or the person succeeding

erty, you have a gain from the casualty or theft.

ment period, discussed later. You also can

to the funds from the casualty or theft cannot

Your gain is figured as follows.

choose to postpone reporting the gain if you

postpone reporting the gain by buying replace-

purchase a controlling interest (at least 80%) in

•

The amount you receive (discussed next),

ment property.

a corporation owning property that is similar or

minus

related in service or use to the property. See

•

Your adjusted basis in the property at the

Controlling interest in a corporation, later.

Replacement Property

time of the casualty or theft. See Adjusted

If you have a gain on damaged property, you

Basis, earlier, for information on adjusted

can postpone reporting the gain if you spend the

You must buy replacement property for the spe-

basis.

reimbursement to restore the property.

cific purpose of replacing your destroyed or sto-

To postpone reporting all the gain, the cost of

len property. Property you acquire as a gift or

Even if the decrease in FMV of your property

your replacement property must be at least as

inheritance does not qualify.

is smaller than the adjusted basis of your prop-

much as the reimbursement you receive. If the

You do not have to use the same funds you

erty, use your adjusted basis to figure the gain.

cost of the replacement property is less than the

receive as reimbursement for your old property

reimbursement, you must include the gain in

to acquire the replacement property. If you

Amount you receive. The amount you re-

your income up to the amount of the unspent

spend the money you receive from the insur-

ceive includes any money plus the value of any

reimbursement.

ance company for other purposes, and borrow

property you receive minus any expenses you

money to buy replacement property, you can still

have in obtaining reimbursement. It also in-

Example. In 1970, you bought an ocean-

postpone reporting the gain if you meet the other

cludes any reimbursement used to pay off a

front cottage for your personal use at a cost of

requirements.

mortgage or other lien on the damaged, de-

$18,000. You made no further improvements or

stroyed, or stolen property.

additions to it. When a storm destroyed the cot-

Advance payment. If you pay a contractor in

tage this January, the cottage was worth

advance to replace your destroyed or stolen

Example. A hurricane destroyed your per-

$250,000. You received $146,000 from the in-

property, you are not considered to have bought

sonal residence and the insurance company

surance company in March. You had a gain of

replacement property unless it is finished before

awarded you $145,000. You received $140,000

$128,000 ($146,000 − $18,000).

the end of the replacement period. See Re-

in cash. The remaining $5,000 was paid directly

You spent $144,000 to rebuild the cottage.

placement Period, later.

to the holder of a mortgage on the property. The

Since this is less than the insurance proceeds

amount you received includes the $5,000 reim-

received, you must include $2,000 ($146,000 −

Similar or related in service or use. Re-

bursement paid on the mortgage.

placement property must be similar or related in

$144,000) in your income.

service or use to the property it replaces.

Main home destroyed. If you have a gain

Buying replacement property from a related

because your main home was destroyed, you

Timber loss. Standing timber you bought

person. You cannot postpone reporting a gain

generally can exclude the gain from your income

with the proceeds from the sale of timber

from a casualty or theft if you buy the replace-

as if you had sold or exchanged your home. You

downed by a casualty (such as high winds,

ment property from a related person (discussed

may be able to exclude up to $250,000 of the

earthquakes, or volcanic eruptions) qualifies as

later). This rule applies to the following taxpay-

gain (up to $500,000 if married filing jointly). For

replacement property. If you bought the stand-

ers.

information on this exclusion, see Publication

ing timber within the specified replacement pe-

523. If your gain is more than the amount you

1) C corporations.

riod, you can postpone reporting the gain.

Page 9

Publication 547 - Casualties,disasters,and Thefts - 2002 Page 9

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