Involuntary conversion definition
/What is an Involuntary Conversion?
An involuntary conversion involves the forced disposition of property in exchange for a payment. There can be tax ramifications when the associated payment is made. If there is a loss on an involuntary conversion, the taxpayer can recognize it at once. This gain or loss rule does not apply when the property is the taxpayer's main home.
Example of an Involuntary Conversion
A house is condemned by the local government because a highway is to be built through the property. If the owner recognizes a gain on the difference between the compensation received and the adjusted basis of the lost property, the taxpayer must recognize this as a capital gain. The gain can be deferred if the taxpayer uses the proceeds to acquire a more expensive replacement property. In this case, the gain is deferred until the replacement property is later sold or exchanged.