On July 2, 2020, a tornado destroyed an asset owned by Leigh Inc., a calendar year taxpayer. Leigh's adjusted tax basis in the asset was $22,700, and the reimbursement from its property insurance company was $35,000. If Leigh wants to defer recognizing its $12,300 realized gain, it must replace the asset no later than December 31, 2021.

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To defer recognizing the gain, Leigh Inc. must replace the asset within a specific period, generally two years after the close of the first taxable year in which any part of the gain is realized. Since the loss occurred in 2020, Leigh would have until December 31, 2022, to replace the asset, not December 31, 2021.

On July 2, 2020, a Tornado Destroyed an Asset Owned