Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a tornado in October 2018. He receives insurance proceeds of $250,000 in January 2019. If before 2021, Dennis replaces the warehouse with another warehouse costing at least $250,000, he can elect to postpone the recognition of any realized gain.

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This is an example of the involuntary conversion rule under section 1033 of the Internal Revenue Code. If Dennis replaces the destroyed warehouse with another similar property within a certain timeframe at a similar or higher cost, he can defer the recognition of any realized gain on the destruction of the warehouse. The insurance proceeds do not have to be reinvested in the new property, but can be used for other purposes.

Dennis, a Calendar Year Taxpayer, Owns a Warehouse (Adjusted Basis