Question

When an involuntary conversion is due to the condemnation of real property held for productive use in a trade or business or for investment, when will the replacement period end?

1) Three years after the close of the first tax year in which any part of the gain is realized
2) One year after the close of the first tax year in which any part of the gain is realized
3) Five years after the close of the first tax year in which any part of the gain is realized
4) Ten years after the close of the first tax year in which any part of the gain is realized

Answer 1

The replacement period for involuntary conversion due to condemnation of real property used in a trade or business or for investment purposes ends three years after the close of the first tax year in which any part of the gain is realized.

Step-by-step explanation:

When an involuntary conversion occurs due to condemnation of real property held for productive use in a trade or business or for investment, the replacement period ends three years after the close of the first tax year in which any part of the gain is realized. This means option 1 is correct.

Involuntary conversions occur when property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and the taxpayer receives insurance or other compensation. The purpose of the replacement period is to allow taxpayers to defer paying taxes on any gain if they reinvest the proceeds in similar or related property. It's important for individuals and businesses to utilize this time frame to avoid immediate tax liability on gains. In specific circumstances, such as federally declared disasters, the replacement period may be extended. However, for standard involuntary conversions related to condemnation, the three-year rule applies as per the requirements of the Internal Revenue Service, unless stated otherwise in specific provisions.