Gatlinburg Fire

[Snaggletooth]

A client bought a condo in the Smoky Mountains and closed just before Thanksgiving. A week later it burned to the ground in the Nov 29th Gatlinburg fire.

With respect to the loss:

1) Does a fire loss qualify under "involuntary conversion" rules?
2) If so, and an extremely favorable insurance settlement results in a gain, can the gain reduce the basis of replacement property instead of being taxable?
3) If both of the above are true, how is the best way to report? (i.e. can 4684 be avoided in favor of Sch D?)

[Roland Slugg]

1) Does a fire loss qualify under "involuntary conversion" rules?

Of course. (Code §1033(a))

2) If so, and an extremely favorable insurance settlement results in a gain, can the gain reduce the basis of replacement property instead of being taxable?

No. In order for the gain to not be taxable, the taxpayer must acquire replacement property within two years after the end of the year in which the involuntary conversion occurred ... i.e. NLT December 31, 2018 in your client's case. The replacement property must be similar to the property replaced. If he buys replacement property, gain is recognized only to the extent the amount realized on the conversion exceeds the cost of the replacement property. (Code §1033(a)(2)(A))

3) If both of the above are true, how is the best way to report? (i.e. can 4684 be avoided in favor of Sch D?)

If there is a gain and the T/P elects not to postpone it, use F-4684 and Schedule D. He he elects to postpone the gain, don't use either form. Instead, attach a statement to the tax return. See IRS Pub 547, page 12,

[Snaggletooth]

My hunch was right

Thanks Mr. Slugg - all my hunches were right (for a change).