Grantly Seafood is a calendar year taxpayer. In 2020, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2020, Grantly received a $1.2 million reimbursement from its insurance company. What is the latest date that Grantly can replace the boats to avoid gain recognition from the involuntary conversion?

Question

Quizplus · Accepted Answer

Under the U.S. tax code, when business property is involuntarily converted (such as by destruction in a hurricane), the taxpayer can defer recognition of gain if the insurance proceeds are reinvested in property similar or related in service or use to the property destroyed. The taxpayer generally has two years from the end of the first tax year in which any part of the gain is realized to replace the property. Since the boats were destroyed in 2020, and Grantly is a calendar year taxpayer, the end of the first tax year in which the gain was realized is December 31, 2020. Therefore, Grantly has until December 31, 2022, to replace the boats and avoid gain recognition.

Grantly Seafood Is a Calendar Year Taxpayer