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

18.24 Cost of Replacement Property Determines Postponed Gain

To fully defer tax on the replacement of involuntarily converted property (18.20), the cost of the replacement property must be equal to or exceed the net proceeds from the conversion. If replacement cost is no more than the adjusted basis of the converted property, you report the entire gain. If replacement cost is less than the amount realized on the conversion but more than the basis of the converted property, the difference between the amount realized and the cost of the replacement is reported as gain; you may elect to postpone tax on the balance of the gain. See Examples 1–3 below.

Condemnation award.

The award received from a state authority may be reduced by expenses of getting the award such as legal, engineering, and appraisal fees. The treatment of special assessments and severance damages received when part of your property is condemned is explained below (18.25). Payments made directly by the authority to your mortgagee may not be deducted from the gross award.

Do not include as part of the award interest paid on the award for delay in its payment; you report the interest as interest income. The IRS may treat as interest part of an award paid late, even though the award does not make any allocation for interest.

Relocation payments are not considered part of the condemnation award and are not treated as taxable income to the extent that they are spent for purposes of relocation; they increase basis of the ...