Postponing Gain Do not report a gain if you receive reimbursement in the form ofproperty similar or related in service or use to the destroyed,stolen, or other involuntarily converted property. Your basis in thenew property is the same as your adjusted basis in the property itreplaces. You must ordinarily report the gain on your stolen, destroyed, orother involuntarily converted property if you receive money or unlikeproperty as reimbursement. But you can choose to postpone reportingthe gain if you purchase replacement property that is similar orrelated in service or use to your destroyed, stolen, or otherinvoluntarily converted property within a specific replacement period. To postpone all the gain, the cost of your replacement propertymust be at least as much as the reimbursement you receive. If the costof the replacement property is less than the reimbursement, you mustinclude the gain in your income up to the amount of the unspentreimbursement. Replacement Property You must buy replacement property for the specific purpose ofreplacing your property. Your replacement property must be similar orrelated in service or use to the property it replaces. You do not haveto use the same funds you receive as reimbursement for your oldproperty to acquire the replacement property. If you spend the moneyyou receive for other purposes, and borrow money to buy replacementproperty, you can still choose to postpone the gain if you meet theother requirements. Property you acquire as a gift or inheritance doesnot qualify as replacement property. Buying replacement property from a related person.You cannot postpone reporting a gain from a casualty, theft, orother involuntary conversion if you buy the replacement property froma related person (discussed later). This rule applies to involuntaryconversions occurring after the following dates. February 5, 1995, for C corporations and partnerships inwhich more than 50% of the capital or profits interest is owned by Ccorporations. June 8, 1997, for individuals, partnerships --otherthan those in (1) above-- and S corporations if the totalrealized gain for the tax year on all involuntarily convertedproperties on which there are realized gains is more than$100,000. For involuntary conversions described in (2) above, gainscannot be offset with any losses when determining whether the totalgain is more than $100,000. If the property is owned by a partnership,the $100,000 limit applies to the partnership and each partner. If theproperty is owned by an S corporation, the $100,000 limit applies tothe S corporation and each shareholder. Exception.This rule does not apply if the related persons acquired theproperty from an unrelated person within the period of time allowedfor replacing the involuntarily converted property. Related persons.Under this rule, related persons include, for example, acorporation and an individual who owns more than 50% of itsoutstanding stock, and two partnerships in which the same Ccorporations own more than 50% of the capital or profits interests.For more information on related persons, see Nondeductible Lossunder Sales and Exchanges Between Related Persons inchapter 2 of Publication 544. Owner-user.If you are an owner-user, "similar or related in service or use"means that replacement property must function in the same way as theproperty it replaces. Examples of property that functions in the sameway as the property it replaces are a home that replaces another home,a dairy cow that replaces another dairy cow, and farm land thatreplaces other farm land. A passenger automobile that replaces atractor does not qualify. Neither does a breeding cow that replaces adairy cow. Soil or environmental contamination.If, because of soil or environmental contamination, it is notpractical for you to reinvest your insurance money from destroyedlivestock in property similar or related in service or use to thelivestock, you can treat other property, including real property usedfor farming purposes, as property similar or related in service or useto the destroyed livestock. Standing crop destroyed by casualty.If a storm or other casualty destroyed your standing crop and youuse the insurance money to acquire either another standing crop or aharvested crop, this purchase qualifies as replacement property. Thecost of planting a new crop does not qualify as a replacement for thedestroyed crop, unless you use the crop method of accounting(discussed in chapter 3).In this case, the costs of bringing the newcrop to the same level of maturity as the destroyed crop qualify asreplacement costs. Timber loss.Standing timber you bought with the proceeds from the sale oftimber downed by a casualty, such as high winds, earthquakes, orvolcanic eruptions, qualifies as replacement property. If you boughtthe standing timber within the replacement period, you can postponereporting the gain. Business or income-producing property located in a federaldisaster area.If your destroyed business or income-producing property was locatedin a federally declared disaster area, any tangiblereplacement property you acquire for use in a business is treated assimilar or related in service or use to the destroyed property. Formore information, see Disaster Area Losses in Publication 547. Substituting replacement property.Once you have acquired qualified replacement property that youdesignate as replacement property, you cannot substitute otherqualified replacement property. The designation is made by thestatement with your return reporting that you have acquiredreplacement property. However, if you discover that the originalreplacement property was not qualified replacement property, you can,within the replacement period, substitute the new qualifiedreplacement property. Taxpayer's death.If a taxpayer dies after having a gain, but before buyingreplacement property, the gain must be reported for the year in whichthe decedent realized the gain. The executor of the estate or theperson succeeding to the funds from the casualty or theft cannotpostpone the gain by buying replacement property. Replacement Period To postpone reporting your gain, you must buy replacement propertywithin a specified period of time. This is the replacement period. The replacement period begins on the date your property wasdamaged, destroyed, stolen, sold, or exchanged. The replacement periodends 2 years after the close of the first tax year in whichyou realize any part of your gain from the involuntary conversion. Condemnation.The replacement period for a condemnation begins on the earlier ofthe following dates. The date on which you disposed of the condemnedproperty. The date on which the threat of condemnation began. The replacement period ends 2 years after the close ofthe first tax year in which any part of the gain on the condemnationis realized. If real property held for use in a trade or business or forinvestment (not including property held primarily for sale) iscondemned, the replacement period ends 3 years after theclose of the first tax year in which any part of the gain on thecondemnation is realized. Extension.You may get an extension of the replacement period if you apply tothe District Director of the Internal Revenue Service for your area.Include all the details about your need for an extension. Make yourapplication before the end of the replacement period. However, you canfile an application within a reasonable time after the replacementperiod ends if you can show a good reason for the delay. You will getan extension of the replacement period if you can show reasonablecause for not making the replacement within the regular period. How To Postpone Gain You postpone your gain by reporting your choice on your tax returnfor the year you have the gain. You have the gain in the year youreceive insurance proceeds or other reimbursements that result in again. Required statement.You should attach a statement to your return for the year you havethe gain. This statement should include all of the followinginformation. The date and details of the casualty, theft, or otherinvoluntary conversion. The insurance or other reimbursement you received. How you figured the gain. Replacement property acquired before return filed.If you acquire replacement property before you file your return forthe year you have the gain, your statement should also includedetailed information about all of the following. The replacement property. The postponed gain. The basis adjustment that reflects the postponed gain.(Reduce the basis of the replacement property by the amount ofpostponed gain.) Any gain you are reporting as income. Replacement property acquired after return filed.If you intend to buy replacement property after you file yourreturn for the year you realize gain, your statement should also saythat you are choosing to replace the property within the requiredreplacement period. You then attach another statement to your return for the year inwhich you buy the replacement property. Show in this statementdetailed information on the replacement property. If you acquire partof your replacement property in one year and part in another year, youmust make a statement for each year. Include in the statement detailedinformation on the replacement property bought in that year. Amended return.You must file an amended return (Form 1040X) for the tax year ofthe gain in either of the following situations. You do not acquire replacement property within thereplacement period. On this amended return, you must report the gainand pay any additional tax due. You acquire replacement property within the requiredreplacement period but at a cost less than the amount you receive fromthe casualty, theft or other involuntary conversion. On this amendedreturn you must report the portion of the gain that cannot bepostponed and pay any additional tax due.