The Napa and Sonoma fires have destroyed thousands of properties. This post addresses the tax ramifications which result when the property owner receives their insurance payments.
Under the Internal Revenue Code, the destruction of property is called an “involuntary conversion” and the receipt of insurance proceeds is treated as if the owner had sold the property for the amount of the insurance payments received. For example, assume you own a property with a basis of $100,000 which is destroyed by a fire. Assume further that you receive $400,000 from the insurance company. Under these facts you would have $300,000 in taxable gain. Talk about adding insult to injury. Section 1033 of the Internal Revenue Code provides some relief. It says that if you use the insurance money to buy replacement property (or rebuild the destroyed property), you can defer the gain, if you rebuild or purchase new property within two years after you receive the insurance proceeds. (This two year period is extended to four years in the case of the loss of your principal residence in the event of a federally declared disaster area.) If the property is rebuilt, it must be finished within two years (or four years in the case of a principal residence in a federally declared disaster area). It is possible to apply for an extension with the IRS to extend these deadlines. Thus, under the example above, if the $400,000 is used to purchase a new property, or to rebuild the replaced property, the gain can be deferred and you would take a $100,000 basis in the new/replaced property if you rebuilt or replace the property within two years after receipt of the insurance proceeds. The rule is a bit more complex for single family homes used as a primary residence. Assume that your principal residence has a basis of $100,000 and it is destroyed by fire. If you receive $400,000, you would be able to exclude $250,000 (if you file a single return) or $500,000 (if you file a joint return). If you are filing jointly, the full $400,000 payment would be exempt from taxation. If you are filing jointly, $50,000 of the payment would be taxable ($400,000, less $100,000 basis, less $250,000 exemption). You would need to use the $50,000 to rebuild or find a replacement property to exclude this amount. In order to defer all of the insurance proceeds, all of the proceeds need to be used to rebuild or buy replacement property. Thus, if you took the $400,000 in insurance proceeds, but used just $300,000 to rebuild (or find replacement property), you would have $100,000 of taxable gain.
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11/6/2019 06:03:42 am
https://www.altheqa-eg.com/stone-prices/
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blogHi. I'm Stephen Flynn. Attorney and founder of the Law Offices of Stephen M. Flynn. This is my blog. Enjoy! Archives
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