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Video instructions and help with filling out and completing What Form 4797 Conversions

Instructions and Help about What Form 4797 Conversions

Hi I'm Jeff Lovell a staff accountant with a a accounting and today we're talking about the tax benefits and rules related to involuntary conversions an involuntary conversion is damage destruction theft or condemnation of property the results in a reimbursement usually through an insurance claim or a condemnation award such reimbursements are taxable the gain or loss that you report is the difference between the payment you receive and your original cost basis this is what you originally paid for the item - any depreciation you might have taken if your cost basis is small and the payment is big the difference is a gain if your cost basis is large relative to your payment the difference is a loss the loss must be reported in the year it happened but you can choose to report the gain now or in the future the procedure for electing to defer the gain is to first not report the gain on your tax return and second attach a statement which includes an explanation of the conversion event the amount of the reimbursement you receive your original cost basis and the game being deferred and a statement that you will be purchasing replacement property within two years if you use this provision and follow the rules you will not pay tax on the gain until you subsequently dispose of the replacement property there are a number of rules that must be followed the first is that you must replace the property with that of a similar type and use and do so within two years let's work off of an example sandy has fully depreciated a rental house she inherited in 1974 this means her cost basis is now zero on May tenth of 2022 the city condemns and tears down the house she receives a condemnation award from the city for $32,000 she has two options she can pay tax on the $32,000 of income on her 2022 tax return or she can choose to purchase another rental property honored before December 31st 2022 the other rule is the excess reimbursement rule replacement property must be at least as much as the payment received if some of the funds are not invested in replacement property the access is taxable returning to the example if sandy buys another rental house but for only $28,000 within the time frame she wrote when t15 income taxes on $4,000 that's the amount that she pocketed if you have questions about the topic covered in this video or other tax or accounting questions call the experts at aaaa accounting call us today to schedule an appointment to discuss your tax situation we can help.

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