Involuntary Conversions

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

Reporting Gain or Loss

Gain or loss from an involuntary conversion of your property is generally recognized for tax purposes unless the property is your main home. You report the gain or take away the loss on your tax return for the year you realize it. (You cannot deduct a loss from an involuntary adaptation of property you held for personal use unless the loss resulted from a casualty or theft.)

However, depending on the type of property you receive, you may not have to statement a gain on an involuntary conversion. You do not report the gain if you obtain property that is similar or related in service or use to the converted property. Your basis for the new property is the same as your basis for the changed property. The gain on the involuntary conversion is deferred until a taxable sale or replace occurs.