Wednesday, December 12, 2012



With all the major disasters occurring, sometimes older disaster events fall off the “radar.” Yet these prior events often have continuing significance to those who experienced them.

For instance, in the past two years I have been assisting taxpayers who experienced disaster events in 2007. In many of these cases the taxpayers realized gains as the compensation they received exceeded the cost basis of the property that was damaged or lost. And now in 2012 and continuing into 2013 the “replacement period” for these people will expire.

Why will it expire and exactly when will it expire?
For declared disasters involving a primary personal residence, the “replacement period” extends through the fourth year following the first year in which the taxpayer first realizes a gain (cumulative Compensation greater that cost basis of the property lost or damaged). If that mark was reached in 2008, then 2012 is the year that the “replacement period” expires.

What if the taxpayer has not yet reinvested the required proceeds and will not complete that reinvestment by the end of 2012?

It turns out that the IRS has a possible solution. Here is what the official IRS publication (Pub. 547) has t say on the subject:

Extension. You can apply for an extension of the replacement period. Send your written appli­cation to the Internal Revenue Service Center where you file your tax return. See your tax return instructions for the address. Your applica­tion must contain all the details about the need for the extension. You should make the applica­tion before the end of the replacement period.
However, you can file an application within a reasonable time after the replacement period ends if you have a good reason for the delay. An extension may be granted if you can show that there is reasonable cause for not making the replacement within the regular period.
Ordinarily, requests for extensions are not made or granted until near the end of the re­placement period or the extended replacement period. Extensions are usually limited to a period of not more than 1 year. The high market value or scarcity of replacement property is not suffi­cient grounds for granting an extension. if your replacement property is being constructed and you clearly show that the construction cannot be completed within the replacement period, you may be granted an extension of the period.

Yes, the IRS may grant an extension, one year at a time. But, you have to ask and that request needs to be made by the end of the original “replacement period.” There is no form, it will take a one or two page document that needs to be sent to the IRS Service Center where the original tax return  for the year that the gain was originally realized. The envelope should note that it should be forwarded to the “Involuntary Conversion Coordinator” for the district.

For losses that are not in a “Declared Disaster Area” the four year “replacement period” is only two years. That is two years from the end of the first year that a gain is realized, not necessarily the year of the loss.

Here are some questions that might apply to your situation:
1.      Was your property damaged in a disaster in recent years?
2.      When did you receive proceeds from your insurance company to compensate you for your loss and pay to replace or repair your property?
3.      Have the insurance or other compensation proceeds exceeded the cost basis of the property?
4.      Can you determine how long do you have to complete the repair or replacement?
5.      Will the “replacement period” expire this year and you have not yet reinvested the required proceeds?

Don’t let this deadline pass you by. It is important that you communicate with the IRS. If you have been making progress, but are not fully reinvested, you have a good chance of getting the extension.

All rights to reproduce or quote any part of the chapter in any other publication are reserved by the author. Republication rights limited by the publisher of the book in which this chapter appears also apply.


Certified Public Accountant

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This material was contributed by John Trapani. A Certified Public Accountant who has assisted taxpayers since 1976, in analyzing and reporting transactions of the type covered in this material.  
Internal Revenue Service Circular 230 Disclosure
This is a general discussion of tax law. The application of the law to specific facts may involve aspects that are not identical to the situations presented in this material. Relying on this material does not qualify as tax advice for purpose of mounting a defense of a tax position with the taxing authorities
The analysis of the tax consequences of any event is based on tax laws in effect at the time of the event.
This material was completed on the date of the posting
© 2012, John Trapani, CPA,

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