Video: Involuntary Conversions

Nick Palazzolo, CPA, demystifies the complexities surrounding involuntary conversions, by breaking down the scenarios where property is lost through theft, destruction, or governmental acquisition. He walks through the tax implications that arise when compensation is received, and the conditions under which this compensation may see tax deferral, especially if reinvested in like-kind properties. As he delves into the nitty-gritty of gain or loss recognition and the intricacies of a 1033 election, Nick uses relatable examples to illustrate how these rules apply to property conversions and taxpayer compensations, ensuring the concepts are clear and memorable. The lesson further explores the tax treatment of such events, including capital asset considerations when vacating rental accommodations and the impact of capital losses from S-corporations on individual taxes.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Involuntary conversions. You hate to see it. This is something that comes up in a few other lessons as well. We just want to touch upon it here. There's just a lot of overlap, but hey, these are important topics to know, so it doesn't hurt that you're seeing it again. Involuntary conversions refer to situations where a taxpayer's property is destroyed, stolen, or taken away by those damn government authorities through condemnation or eminent domain condemnation. Say the government comes by the health and safety board. They say, oh, this house is going to fall apart. You have to get out. Or there's poison or rat droppings or something like that. Eminent domain. They say, we need you to buy your house and destroy it so we can build a super mega highway. Touch upon that in another lesson as well. In such cases, the property owner may be entitled to compensation and the tax treatment of the compensation received is governed by specific rules under the IRC in the United States. What are the effects of this? Whether your house is burned down, you get insurance proceeds, it's taken away, any of these conversions, you're converting your property to hopefully cash. Hopefully you're getting money for that. And it's involuntary. You're not choosing to do this. Now, the tax treatment here depends on whether the compensation received is reinvested. So the government takes your property away, gives you the fair market value of it. They condemn it. They pay you for it. Your insurance gives you money, hopefully of insurance if your property is destroyed, stolen or taken away. So that's what we're going to see here. What's the tax treatment of that compensation received? Now, if you reinvest it in a similar or like kind property, which

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Property Tax: Acquisition and Disposition of Assets

Module: 5 Concepts, 55 Videos

Basis and Holding Period of Assets Overview

0:44

Introduction to Basis and Holding Period of Assets

8:20

Costs Included in a Asset's Taxable Basis

7:24

Examples of Calculating Tax Basis