J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

18.19 Defer Gain by Replacing Property

If your property is destroyed, damaged, stolen, or seized or condemned by a government authority, this is considered to be an involuntary conversion for tax purposes. If upon an involuntary conversion you receive insurance or other compensation that exceeds the adjusted basis of the property, you realize a gain that is taxable unless you may defer gain (18.20–18.24) or, in the case of a principal residence, you may exclude gain under the rules in Chapter 29.

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Filing Tip

Involuntary Conversion of Personal Residence

Gain on the conversion of a principal residence may escape tax under the rules discussed in Chapter 29. If not, tax may be deferred under the involuntary conversion replacement rules.

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You may elect to postpone tax on the full gain provided you invest the proceeds in replacement property the cost of which is equal to or exceeds the net proceeds from the conversion. Buying a replacement from a related party generally qualifies only if your gains from involuntary conversions are $100,000 or less (18.23). Gain realized on a destroyed or condemned principal residence that exceeds the allowable exclusion under the rules in Chapter 29 may be postponed by reinvesting at least the conversion proceeds minus the excluded gain (18.20–18.24).

The replacement period (18.22) is two years for personal-use ...