Page 100 - Virtual Currencies
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         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
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