Insurance Proceeds and 1031 Exchange

This is how I believe it works.

1. Assume the M settlement is equal to or less than the depreciated tax basis and it is not greater than the actual amount of damages. There is no tax consequence of the payment. Owner can use the funds to repair the property before selling it or not repair it and sell it at a much lower price.

1. Assume the M is greater than the tax basis and is not greater than the actual loss. There is a taxable gain (the amount received in excess of basis) if the owner does not use the money to repair the property. The gain can be deferred if the owner obtains replacement property within the requisite time period. The gain reduces the basis of the new property. I believe this requires that an election be made on the tax return.

Thanks, Alan. That's what I thought. The buyer wants to buy it as it for the $3 million amount, and then the seller wants to put the $1 million he gets from insurance into the next property. His accountant is telling him that he has to jump through some hoops to do that. But as far as I can tell, he can do what he plans to without any problem or need to recognize taxable income.

I just told him (assuming that the insurance money doesn't exceed actual damages and that the total is less than his basis) not to worry about it.