TurboTax / Tax Calculators & Tips / All Tax Guides / Home Ownership / What are the Tax Implications of Involuntary Conversions?

What are the Tax Implications of Involuntary Conversions?

Updated for Tax Year 2015


The federal tax code uses the term "involuntary conversion" to refer to cases in which you receive compensation for the destruction, theft or confiscation of property. If you end up with a new property to replace the old one, you usually won't have any immediate tax implications. But if you just take the money and walk away, an involuntary conversion may be taxed like a regular sale, or a voluntary conversion.

Types of involuntary conversions

Two women overlooking paperwork

Generally, the tax code recognizes four kinds of involuntary conversions:

  • property destroyed by fire, weather or some other hazard
  • stolen property
  • property taken by the government for public use, known as "condemned property"
  • Property disposed of under the threat of condemnation

Receiving money or property as compensation for the loss is what makes a property a "conversion." This includes things such as:

  • an insurance settlement
  • a court judgment or a payment from the government that condemns a property
    • Under the Constitution, governments can't take someone's property without paying for it.

If you get a replacement

Whether an involuntary conversion has a tax effect depends on what you receive as compensation for your loss, and what you do with it. If you receive property similar to what you lost, the conversion generally won't affect your tax situation in the short term. The same is true if you receive money as compensation, and you use it to buy a replacement property for the one you lost.

So, for example, an insurance settlement that rebuilds a building you own after a fire or replaces your car after being destroyed in an accident wouldn't have any tax implications. The same is true if the government forces you out of your house by condemnation but gives you money to buy a new home. In these cases, the involuntary conversions are often referred to as involuntary exchanges.

Cost basis transfers to the new property

If you receive similar property as compensation, or if you use the money you receive to buy a replacement, the adjusted basis of your lost property is simply transferred to your new property. The adjusted basis of the original property is essentially your investment in that property -- how much you have spent to acquire and improve it less any allowable basis-reducing deductions, such as depreciation.

This is important because it means you generally won't have to pay any taxes now if the value of the compensation you receive is greater than your adjusted basis in the property you lost. Such a gain would be taxable if you sold the property rather than lost it in an involuntary conversion. Transferring the basis to the new property can defer any tax hit until you sell it.

When you don't replace the property

If you receive money as compensation for your lost property and you don't use that money to buy a replacement property, then the involuntary conversion will generally be treated like a sale. Subtract your adjusted basis from the compensation you receive. The difference is a usually taxable capital gain.

If the compensation is less than your basis, you likely have a capital loss, which you may be able to write off on your taxes. Generally:

  • You can write off capital losses for involuntary conversions when property is stolen or destroyed.
  • Capital losses from condemnations can be written off on your taxes only if the property was being used for business or investment.
  • Capital losses on condemned property that you owned only for personal use cannot be written off.

Primary residence is an exception

Involuntary conversions of private homes are an exception to the rules. According to the IRS, if the property you lose to involuntary conversion is your primary residence, generally, you will not have any tax consequences, even if you don't purchase a new home and realized a capital gain or loss.

Business and personal taxes in one

Just answer simple questions about your business and life, and TurboTax Home & Business takes care of the rest.

For only $104.99*
Start for Free

Looking for more information?

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Security is built into everything we do
Here's how
* Important Offer Details and Disclosures
  • Filing Deadline: IRS filing deadline for tax year 2015 is April 18, 2016 (except for residents of Massachusetts or Maine, where the IRS filing deadline for tax year 2015 is April 19, 2016).
  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Free 1040EZ/A + Free State offer only available with TurboTax Federal Free Edition; Offer may change or end at any time without notice. Actual prices are determined at the time of print or e-file and are subject to change without notice. Savings and price comparisons based on anticipated price increase expected 3/18/16. Special discount offers may not be valid for mobile in-app purchases.
  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal e-file of up to 5 federal tax returns. Additional fees apply for efiling state returns. E-file fees do not apply to New York state returns. Savings and price comparison based on anticipated price increase expected 3/18/16. Prices subject to change without notice.
  • Anytime, anywhere: Internet access required; standard message and data rates apply to download and use mobile app.
  • Fastest refund possible: Fastest tax refund with efile and direct deposit; tax refund timeframes will vary.
  • Pay for TurboTax out of your federal refund: A $X.XX Refund Processing Service fee applies to this payment method. Prices are subject to change without notice. This benefit is available with TurboTax Federal products except the TurboTax Home & Business/QuickBooks Self-Employed bundle offers.
  • About our TurboTax Product Experts: Customer service and product support vary by time of year.
  • About our credentialed tax experts: Live tax advice service is available via phone for your toughest tax questions; fees may apply. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Not available for TurboTax Business customers.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2014 TurboTax products.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.