Page 100 - Virtual Currencies
P. 100
12:10 - 7-Feb-2023
Page 9 of 42
Fileid: … tions/p544/2022/a/xml/cycle03/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
then $700 of the special assessment. Your must report the gain up to the unspent part of determining whether the total gain is more than
$4,000 condemnation award is reduced by the the amount realized. $100,000. If the property is owned by a partner-
$100 balance of the special assessment, leav- The basis of the replacement property is its ship, the $100,000 limit applies to the partner-
ing a $3,900 net condemnation award. cost reduced by the postponed gain. Also, if ship and each partner. If the property is owned
your replacement property is stock in a corpora- by an S corporation, the $100,000 limit applies
Part business or rental. If you used part of tion that owns property similar or related in serv- to the S corporation and each shareholder.
your condemned property as your home and ice or use, the corporation will generally reduce
part as business or rental property, treat each its basis in its assets by the amount by which Exception. This rule does not apply if the
part as a separate property. Figure your gain or you reduce your basis in the stock. See Control- related person acquired the property from an
loss separately because gain or loss on each ling interest in a corporation, later. unrelated person within the replacement period.
part may be treated differently.
Some examples of this type of property are You can use Part 3 of Table 1-3 to fig- Advance payment. If you pay a contractor in
a building in which you live and operate a gro- TIP ure the gain you must report and your advance to build your replacement property,
you have not bought replacement property un-
cery, and a building in which you live on the first postponed gain.
floor and rent out the second floor. less it is finished before the end of the replace-
Postponing gain on severance damages. If ment period (discussed later).
Example. You sold your building for you received severance damages for part of
$24,000 under threat of condemnation to a pub- your property because another part was con- Replacement property. To postpone report-
ing gain, you must buy replacement property for
lic utility company that had the authority to con- demned and you buy replacement property,
demn. You rented half the building and lived in you can elect to postpone reporting gain. See the specific purpose of replacing your con-
demned property. You do not have to use the
the other half. You paid $25,000 for the building Treatment of severance damages, earlier. You
and spent an additional $1,000 for a new roof. can postpone reporting all your gain if the re- actual funds from the condemnation award to
acquire the replacement property. Property you
You claimed allowable depreciation of $4,600 placement property costs at least as much as
on the rental half. You spent $200 in legal ex- your net severance damages plus your net con- acquire by gift or inheritance does not qualify as
replacement property.
penses to obtain the condemnation award. Fig- demnation award (if resulting in gain).
ure your gain or loss as follows. You can also make this election if you spend Similar or related in service or use. Your
the severance damages, together with other replacement property must be similar or related
Resi- Busi- money you received for the condemned prop- in service or use to the property it replaces.
dential ness erty (if resulting in gain), to acquire nearby prop- If the condemned property is real property
Part Part erty that will allow you to continue your busi- you held for productive use in your trade or
1) Condemnation award ness. If suitable nearby property is not available business or for investment (other than property
received . . . . . . . . . . . . . . . . $12,000 $12,000 and you are forced to sell the remaining prop- held mainly for sale), like-kind property to be
2) Minus: Legal expenses, erty and relocate in order to continue your busi- held either for productive use in trade or busi-
$200 . . . . . . . . . . . . . . . . . . . (100) (100) ness, see Postponing gain on the sale of rela-
3) Net condemnation award . . . . . $11,900 $11,900 ness or for investment will be treated as prop-
4) Adjusted basis: ted property next. erty similar or related in service or use. For a
1 /2 of original cost, If you restore the remaining property to its discussion of like-kind property, see Like-Kind
$25,000 . . . . . . . . . . . . . . $12,500 $12,500 former usefulness, you can treat the cost of re- Property under Like-Kind Exchanges, later.
Plus: 1 /2 of cost of roof, storing it as the cost of replacement property.
$1,000 . . . . . . . . . . . . . . . . 500 500 Owner-user. If you are an owner-user, sim-
Total . . . . . . . . . . . . . . . . $13,000 $13,000 Postponing gain on the sale of related ilar or related in service or use means that re-
5) Minus: Depreciation . . . . . . . . . . . . . . . . (4,600) property. If you sell property that is related to placement property must function in the same
6) Adjusted basis, business part . . . . . . . . . $8,400 the condemned property and then buy replace- way as the property it replaces.
7) (Loss) on residential ment property, you can elect to postpone re-
property . . . . . . . . . . . . ($1,100) porting gain on the sale. You must meet the re- Example. Your home was condemned and
8) Gain on business property . . . . . . . . $3,500 quirements explained earlier under Related you invested the proceeds from the condemna-
The loss on the residential part of the property is not property voluntarily sold. You can postpone re- tion in a grocery store. Your replacement prop-
erty is not similar or related in service or use to
deductible. porting all your gain if the replacement property the condemned property. To be similar or rela-
costs at least as much as the amount realized ted in service or use, your replacement property
Postponement of Gain from the sale plus your net condemnation must also be used by you as your home.
award (if resulting in gain) plus your net sever-
ance damages, if any (if resulting in gain). Owner-investor. If you are an owner-in-
Do not report the gain on condemned property vestor, similar or related in service or use
if you receive only property that is similar or re- Buying replacement property from a related means that any replacement property must
lated in service or use to the condemned prop- person. Certain taxpayers cannot postpone re- have the same relationship of services or uses
erty. Your basis for the new property is the porting gain from a condemnation if they buy to you as the property it replaces. You decide
same as your basis for the old. the replacement property from a related person. this by determining all of the following informa-
For information on related persons, see Nonde- tion.
Money or unlike property received. You or- ductible Loss under Sales and Exchanges Be- • Whether the properties are of similar serv-
dinarily must report the gain if you receive tween Related Persons in chapter 2. ice to you.
money or unlike property. You can elect to post- This rule applies to the following taxpayers. • The nature of the business risks connected
pone reporting the gain if you buy property that with the properties.
is similar or related in service or use to the con- 1. C corporations. • What the properties demand of you in the
demned property within the replacement pe- 2. Partnerships in which more than 50% of way of management, service, and relations
riod, discussed later. You can also elect to post- the capital or profits interest is owned by to your tenants.
pone reporting the gain if you buy a controlling C corporations.
interest (at least 80%) in a corporation owning Example. You owned land and a building
property that is similar or related in service or 3. All others (including individuals, partner- you rented to a manufacturing company. The
use to the condemned property. See Control- ships (other than those in (2)), and S cor- building was condemned. During the replace-
ling interest in a corporation, later. porations) if the total realized gain for the ment period, you had a new building built on
To postpone reporting all the gain, you must tax year on all involuntarily converted other land you already owned. You rented out
buy replacement property costing at least as properties on which there is realized gain the new building for use as a wholesale grocery
much as the amount realized for the con- of more than $100,000. warehouse. The replacement property is also
demned property. If the cost of the replacement For taxpayers described in (3) above, gains
property is less than the amount realized, you cannot be offset with any losses when
Chapter 1 Gain or Loss Page 9