Figuring a Gain If you receive insurance or other reimbursement that is more thanyour adjusted basis in the destroyed, damaged, or stolen property, youhave a gain from the casualty or theft. Your gain is figured asfollows. The amount you receive (discussed later), minus Your adjusted basis in the property at the time of thecasualty or theft. Even if the decrease in FMV of your property is smaller than theadjusted basis of your property, use your adjusted basis to figure thegain. Amount you receive.The amount you receive includes any money plus the value of anyproperty you receive minus any expenses you have in obtainingreimbursement. It also includes any reimbursement used to pay off amortgage or other lien on the damaged, destroyed, or stolen property. Example.A hurricane destroyed your personal residence and the insurancecompany awarded you $45,000. You received $40,000 in cash. Theremaining $5,000 was paid directly to the holder of a mortgage on theproperty. The reimbursement you received includes the $5,000 paid onthe mortgage. Main home destroyed.If you have a gain because your main home was destroyed, yougenerally can exclude the gain from your income as if you had sold orexchanged your home. For information on this exclusion, seePublication 523. If your gain is more than the amount you can exclude,but you buy replacement property, you may be able to postpone theexcess gain. See Postponement of Gain, later. Reporting a gain. You generally must report your gain as income in the year youreceive the reimbursement. But you do not have to report your gain ifyou meet certain requirements and choose to postpone the gainaccording to the rules explained under Postponement of Gain,later. For information on how to report a gain, see How To ReportGains and Losses, later. Caution: If you have a casualty or theft gain on personal-use property thatyou choose to postpone (as explained next) and you also have anothercasualty or theft loss on personal-use property, do not consider thegain you are postponing when figuring your casualty or theft lossdeduction. See 10% Rule under Deduction Limits,earlier. Postponement of Gain Do not report a gain if you receive reimbursement in the form ofproperty similar or related in service or use to the destroyed orstolen property. Your basis in the new property is the same as youradjusted basis in the property it replaces. You must ordinarily report the gain on your stolen or destroyedproperty if you receive money or unlike property as reimbursement. Butyou can choose to postpone reporting the gain if you purchase propertythat is similar or related in service or use to the stolen ordestroyed property within a specified replacement period, discussedlater. You can also choose to postpone reporting the gain if youpurchase a controlling interest (at least 80%) in a corporationowning property that is similar or related in service or use to theproperty. See Controlling interest in a corporation, later. If you have a gain on damaged property, you can postpone the gainif you spend the reimbursement to restore the property. 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. Example.In 1955, you bought an oceanfront cottage for your personal use ata cost of $8,000. You made no further improvements or additions to it.When a storm destroyed the cottage this January, the cottage was worth$250,000. You received $146,000 from the insurance company in March.You had a gain of $138,000 ($146,000 - $8,000). You spent $144,000 to rebuild the cottage. Since this is less thanthe insurance proceeds received, you must include $2,000 ($146,000- $144,000) in your income. Buying replacement property from a related person.You cannot postpone reporting a gain from a casualty or theft ifyou buy the replacement property from a related person (discussedlater). This rule applies to casualties and thefts occurringafter 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 all others (including individuals,partnerships --other than those in (1) above-- and Scorporations) if the total realized gain for the tax year on alldestroyed or stolen properties on which there are realized gains ismore than $100,000. For casualties and thefts described in (2) above, gains cannotbe offset with any losses when determining whether the total gain ismore 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 person acquired theproperty from an unrelated person within the period of time allowedfor replacing the destroyed or stolen 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. Making the replacement.You must buy replacement property for the specific purpose ofreplacing your destroyed or stolen property. Property you acquire as agift or inheritance does not qualify. You do not have to use the same funds you receive as reimbursementfor your old property to acquire the replacement property. If youspend the money you receive from the insurance company for otherpurposes, and borrow money to buy replacement property, you can stillpostpone the gain if you meet the other requirements. Advance payment.If you pay a contractor in advance to replace your destroyed orstolen property, you are not considered to have bought replacementproperty unless it is finished before the end of the replacementperiod. See Replacement period, later. Replacement property.Replacement property must be similar or related in service or useto the property it replaces. 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 specified replacement period, you canpostpone reporting the gain. Owner-user.If you are an owner-user, similar or related in service or usemeans that replacement property must function in the same way as theproperty it replaces. Example.Your home was destroyed by fire and you invested the insuranceproceeds in a grocery store. Your replacement property is not similaror related in service or use to the stolen or destroyed property. Tobe similar or related in service or use, your replacement propertymust also be used by you as your home. Main home in disaster area.Special rules apply to replacement property related to the damageto or destruction of your main home (or its contents) if located in afederally declared disaster area. See Disaster Area Losses,later. Owner-investor.If you are an owner-investor, similar or related in service or usemeans that any replacement property must have the same relationship ofservices or uses to you as the property it replaces. You decide thisby determining the following. Whether the properties are of similar service to you. The nature of the business risks connected with theproperties. What the properties demand of you in the way of management,service, and relations to your tenants. Example.You owned land and a building you rented to a manufacturingcompany. The building was destroyed by fire. During the replacementperiod, you had a new building constructed. You rented out the newbuilding for use as a wholesale grocery warehouse. Because thereplacement property is also rental property, the two properties areconsidered similar or related in service or use if there is asimilarity in the following areas. Your management activities. The amount and kind of services you provide to yourtenants. The nature of your business risks connected with theproperties. 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 tangible replacementproperty you acquire for use in a business is treated as similar orrelated in service or use to the destroyed property. For moreinformation, see Disaster Area Losses, later. Controlling interest in a corporation.You can replace property by acquiring a controlling interest in acorporation that owns property similar or related in service or use toyour damaged, destroyed, or stolen property. You can postpone the taxon your entire gain if the cost of the stock that gives youcontrolling interest is at least as much as the amount realized(reimbursement) for your property. You have controlling interest ifyou own stock having at least 80% of the combined voting powerof all classes of voting stock and at least 80% of the totalnumber of shares of all other classes of stock. Basis adjustment to corporation's property.For casualties or thefts after August 20, 1996, the basis ofproperty held by the corporation at the time you acquired control mustbe reduced by the amount of your postponed gain, if any. You are notrequired to reduce the adjusted bases of the corporation's propertiesbelow your adjusted basis in the corporation's stock (determined afterreduction by the amount of your postponed gain). Allocate this reduction to the following classes of property in theorder shown below. Property that is similar or related in service or use to thedestroyed or stolen property. Depreciable property not reduced in (1) above. All other property. If two or more properties fall in class (1), (2), or (3),allocate the reduction to each property in proportion to the adjustedbases of all the properties in that class. The reduced basis of anysingle property cannot be less than zero. Main home replaced.If your gain from a casualty loss of your main home is more thanthe amount you can exclude from your income (see Main homedestroyed under Figuring a Gain, earlier), you canpostpone the excess gain by buying replacement property that issimilar or related in service or use. To postpone all the gain, thereplacement property must cost at least as much as the amount youreceived from the casualty minus the excluded gain. You must reduce the basis of your replacement property by theamount of postponed gain. Also, if you postpone any part of your gainunder these rules, you are treated as having owned and used thereplacement property as your main home for the period you owned andused the destroyed property as your main home. Basis of replacement property. Your basis in replacement property is its cost minus any gainpostponed. In this way, tax on the gain is postponed until you disposeof the replacement property. Example.A fire destroyed your home. The insurance company reimbursed you$67,000 for the property, which had an adjusted basis of $62,000. Youhad a gain of $5,000 from the casualty. If you have another homeconstructed for $70,000 within the time limit, you can postponereporting the gain. You will have reinvested all the reimbursement(including your entire gain) in your new home. Your basis for the newhome will be $65,000 ($70,000 cost minus $5,000 postponed gain). Replacement period. cheap hotels in CoimbraTo postpone reporting your gain, you must buy replacement propertywithin a specified period of time. This is the "replacement period." The replacement period beginson the date your property was damaged, destroyed, or stolen. The replacement period ends2 years after the close of the first tax year in which any part ofyour gain is realized. Main home in disaster area.For your main home (or its contents) located in a federallydeclared disaster area, the replacement period ends 4 years after theclose of the first tax year in which any part of your gain isrealized. See Disaster Area Losses, later. Example 1.You are a calendar year taxpayer. A hurricane destroyed your homein September 1998. In December 1998, the insurance company paid you$3,000 more than the adjusted basis of your home. The area in whichyour home is located is not a federally declared disaster area.Because you first realized a gain from the reimbursement for thecasualty in 1998, you have until December 31, 2000, to replace theproperty. If your home had been in a federally declared disaster area,you would have until December 31, 2002, to replace the property. Example 2.You are a calendar year taxpayer. While you were on your vacation,a valuable piece of antique furniture that cost $2,200 was stolen fromyour home. You discovered the theft when you returned home on August11, 1998. Your insurance company investigated the theft and did notsettle your claim until January 3, 1999, when they paid you $3,000.Because you first realized a gain from the reimbursement for the theftduring 1999, you have until December 31, 2001, to replace theproperty. Extension.You may get an extension of the replacement period if you apply tothe District Director of the Internal Revenue Service for your area.Your application must contain all the details about the need for theextension. You should make the application before the end of thereplacement period. However, you can file an application within a reasonable time afterthe replacement period ends if you have a good reason for the delay.An extension may be granted if you can show that there is reasonablecause for not making the replacement within the regular period. Ordinarily, requests for extensions are not made or granted untilnear the end of the replacement period or the extended replacementperiod. Extensions are usually limited to a period of not more than 1year. The high market value or scarcity of replacement property is notsufficient grounds for granting an extension. If your replacementproperty is being constructed and you clearly show that thereplacement or restoration cannot be made within the replacementperiod, you may be granted an extension of the period. How To Postpone a Gain You postpone your gain from a casualty or theft by reporting yourchoice on your tax return for the year you have the gain. You have thegain in the year you receive insurance proceeds or otherreimbursements that result in a gain. If a partnership or a corporation owns the stolen or destroyedproperty, only the partnership or corporation can choose to postponegain. Required statement.You should attach a statement to your return for the year you havethe gain. This statement should include the following information. The date and details of the casualty or theft. The insurance or other reimbursement you received from thecasualty or theft. 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 postponedgain. Any gain you are reporting as income. Replacement property acquired after return filed.If you intend to acquire replacement property after you file yourreturn for the year in which you have the gain, your statement shouldalso state that you are choosing to replace the property within therequired replacement period. You should then attach another statement to your return for theyear in which you acquire the replacement property. This statementshould contain detailed information on the replacement property. If you acquire part of your replacement property in one year andpart in another year, you must make a statement for each year. Thestatement should contain detailed information on the replacementproperty bought in that year. Substituting replacement property.Once you have acquired qualified replacement property that youdesignate as replacement property, you cannot later substitute otherqualified replacement property. This is true even if you acquire theother property within the replacement period. The designation is madeby the statement 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. Amended return.You must file an amended return (individuals use Form 1040X) forthe tax year of the gain in either of the following situations. You do not acquire replacement property within the requiredreplacement 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 or theft. On this amended return, you must report theportion of the gain that cannot be postponed and pay any additionaltax due. Three-year limit.The period for assessing tax on any gain ends 3 years after thedate you notify the IRS District Director for your area of any of thefollowing. You replaced the property. You do not intend to replace the property. You did not replace the property within the specified periodof time. Death of a taxpayer.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. Changing your mind.You can change your mind about whether to report or to postponeyour gain at any time before the end of the replacement period. Example.Your property was stolen last year. Your insurance companyreimbursed you $10,000, of which $5,000 was a gain. You reported the$5,000 gain on your return for last year (the year you realized thegain) and paid the tax that was due. This year you bought replacementproperty within the replacement period. Your replacement property cost$9,000. Since you reinvested all but $1,000 of your reimbursement, youcan now postpone $4,000 ($5,000 - $1,000) of your gain. To postpone your gain, file an amended return for last year usingForm 1040X. You should attach an explanation showing that youpreviously reported the entire gain from the theft but you now want toreport only the part of the gain ($1,000) equal to the part of thereimbursement not spent for replacement property.