16615: Involuntary Conversion

An involuntary conversion might be caused by a casualty such as a natural disaster, flooding, eminent domain seizure, fire, condemnation, etc. or a theft. Per Publication 544:

"An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Involuntary conversions also are called involuntary exchanges."

If the loss was from a casualty or theft, you can postpone reporting the gain. Per IRS guidelines, the taxpayer has two years to purchase replacement property of a like kind to the property that was lost or destroyed. During that time, the gain may be deferred. For tax purposes, the taxpayer includes a statement with the return that explains the situation and states that gain is being deferred. Per Publication 547: 

"You should attach a statement to your return for the year you have the gain. This statement should include the following.

• The date and details of the casualty or theft.
• The insurance or other reimbursement you received from the casualty or theft.
• How you figured the gain."

In Drake Tax, this statement can be included with an e-filed return via a PDF attachment or by using the SCH screen. See Related Links below for details on these options. There is no form or schedule that must be filed to indicate that a gain from an involuntary conversion is being deferred.

On the 4562 screen, there is a checkbox for involuntary conversion in the if sold section. This checkbox alone does not have any impact on a return. To stop the item from depreciating, a date sold must be entered. If the asset involved in the involuntary conversion should be reported on Form 4797, the following items are required to be entered: date sold, sale price (even if zero), property type, and the involuntary conversion checkbox must be marked. 

For more information, review the sections How to postpone a gain in Publication 547 and Involuntary Conversions in Publication 544.