Final answer:
Yes, the basis and holding period of the converted property generally carry over to the basis and holding period of the replacement property.
Step-by-step explanation:
Yes, when property is involuntarily converted into similar property, the basis and holding period of the converted property generally carry over to the basis and holding period of the replacement property.
This is known as a like-kind exchange and is governed by section 1031 of the Internal Revenue Code (IRC). In a like-kind exchange, the taxpayer can defer capital gains taxes on the property being exchanged, as long as the replacement property is of like-kind and certain other requirements are met.
For example, let's say you own a commercial building that is involuntarily destroyed by a fire. Instead of receiving cash for the loss, you choose to reinvest the insurance proceeds into a similar commercial building. In this case, the basis of the replacement property would be equal to the adjusted basis of the destroyed property, and the holding period of the replacement property would be the same as the holding period of the destroyed property.