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June 2mgmt127a

June 2mgmt127a - June 2 2008 MGMT 127A INVOLUNTARY...

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June 2, 2008 MGMT 127A INVOLUNTARY CONVERSIONS Example You own a riverboat casino in New Orleans that was destroyed by Hurricane Katrina. The casino has been depreciated to zero on your books. You turn a profit on the destruction How? You have a fair market value insurance policy. Your casino was worth $5 million and your insurance policy is will pay you about $5 million. You have made $5 million. You have a realized gain of $5 million. If you had to recognize $5 million, you would lose a percentage to taxes, and wouldn’t be able to build a new, comparable casino. On top of that, you didn’t intend to lose the casino. You view insurance money as an amount that allows you to put up a replacement that is no more and no less than the previously existing structure. When you have an involuntary conversion (due to casualty or theft) gain, the tax law says that as long as you take your insurance money and buy a comparable replacement property promptly, we won’t make you pay tax. You take your cash and reinvest it promptly. You have two years from the end of the year in which you get your money to reinvest it. Example You have been fighting with your insurance company over what the fair market value of your casino was. You may even have gone to court. Say you get your check today. When do you have to reinvest the money by?
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The clock starts ticking on December 31, 2008. You have two years after that, so you must reinvest the money by December 31, 2010. If I get the money and replace it with a comparable or more expensive property, then I pay no taxes on it. Example
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June 2mgmt127a - June 2 2008 MGMT 127A INVOLUNTARY...

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