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RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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The tax law allows, under certain conditions, deferral of gain

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The tax law allows, under certain conditions, deferral of gain recognition for involuntary conversions.

What is the justification for this relief measure?

What happens if the proceeds are not entirely reinvested?
Involuntary conversion is not a sale or exchange occuring between a willing buyer and a willing seller. Hence, if the person whose property is condemned is allowed to reinvest in another property than that is a relief to him since he can invest and not worry about the resulting tax liability from the conversion until he sells the property to a third party.

Generally, you do not report the gain if you receive 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 converted property. This means that the gain is deferred until a taxable sale or exchange occurs.
If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. You will file an amended tax return for the year the conversion took place and recognize the gain upto the unspent part of the amount received that you had elected to postpone.
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