18.20 Involuntary Conversions Qualifying for Tax Deferral
For purposes of an election to defer tax on gains, “involuntary conversion” is more broadly defined than “casualty loss.” You have an involuntary conversion when your property is:
Damaged or destroyed by some outside force.
Stolen, seized, requisitioned, or condemned by a governmental authority.
If you voluntarily sell land made useless to you by the condemnation of your adjacent land, the sale may also qualify as a conversion. Condemnation of property as unfit for human habitation does not qualify. Condemnation, as used by the tax law, refers to the taking of private property for public use, not to the condemnation of property for noncompliance with housing and health regulations. Similarly, a tax sale to pay delinquent taxes is not an involuntary conversion.
Sold under a threat of seizure, condemnation, or requisition.
The threat must be made by an authority qualified to take property for public use. A sale following a threat of condemnation made by a government employee is a conversion if you reasonably believe he or she speaks with authority and could and would carry out the threat to have your property condemned. If you learn of the plan of an imminent condemnation from a newspaper or other news media, the IRS requires you to confirm the report from a government official before you act on the news.