All Forum Posts by: Eric Williams

Per Indopco, capitalization is the norm, while deductions are the exception.

In other words, instead of asking do I have to capitalize this, ask, what Code section provides an exception to capitalization.

One such method can be found in the intangible regs of §1.162-3(a)(1), and §1.162-3(a)(2). 

Under these regs amounts paid or incurred for materials and supplies after 1/1/14 are deductible when purchased if the materials and supplies are incidental, and deductible when used or consumed if non-incidental.

Incidental materials and supplies are those that are carried on hand and which no record of physical consumption is kept, no beginning or ending inventories taken.

For purposes of 1.162-3, materials and supplies are defined as tangible property used or consumed in the taxpayer's operations that is not inventory and that is/are:

1) spare parts

2) fuel, lubricants, water, etc., expected to be consumed in 12 months or less

3) a unit of property having an economic useful life less than 12 months

4) acquisition/production costs less than $200

5) various other types

Take advantage of all the methods for immediate deduction without the need for cost segs.

 Udemy has some pretty solid courses you can catch on discount. Comes with spreadsheets done or you can learn to build.

 Federal Income Tax Spreadsheet Form 1040 (Excel Spreadsheet) Income Tax Calculator (google.com)

This website offers a free 1040 Excel that might help you better understand the mechanics of what is being allowed/disallowed, etc.

Federal Income Tax Spreadsheet Form 1040 (Excel Spreadsheet) Income Tax Calculator (google.com)

 Property converted from residential to rental use must be depreciated using the method and recovery period in effect in the year of conversion (Regs. Sec. 1.168(i)-4(b)). The method that applied in the year the property was originally acquired is irrelevant. Thus, a home that is converted from personal to rental use during 2008 is depreciated over 27.5 years (39 years if the rental is not residential) under the modified accelerated cost recovery system (Sec. 168(c))

The fact that a residence is rented at the time of a sale does not automatically preclude gain attributable to such use from being excluded under Sec. 121. The taxpayer must still meet the ownership and use and the one-sale-in-two-years tests of Secs. 121(b) and (c), and under Sec. 121(d)(6), gain cannot be excluded to the extent of depreciation adjustments attributable to periods after May 6, 1997.

Converting a Residence to Rental Property (thetaxadviser.com)

This is not one transaction, Eric. Installing a roof is separate from the insurance reimbursement. Insurance reimbursement is factored into the calculation of casualty loss but does not affect the depreciable basis of the roof.

So if you say there is a reimbursement because of a casualty loss, how is there no involuntary conversion?

Property Converted Through Receipt of Insurance Proceeds, Condemnation Award or
Qualifying Sales.
i. Under §1033(a)(2), when property is converted into money or property not
similar or related in service or use through receipt of insurance proceeds, a
condemnation award, or upon qualifying sales, non-recognition of gain is
accomplished if the taxpayer

INVOLUNTARY CONVERSION
a. Destruction.
i. Destruction of property for purposes o f §1033 is analogous to casualty under
§165 as an involuntary conversion of property arising from fire, storm,
shipwreck, or other casualty. E


(a)General rule If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted—(1)Conversion into similar property

Into property similar or related in service or use to the property so converted, no gain shall be recognized.

(2)Conversion into money  Into money or into property not similar or related in service or use to the converted property, the gain (if any) shall be recognized except to the extent hereinafter provided in this paragraph:(A)Nonrecognition of gain If the taxpayer during the period specified in subparagraph (B), for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, or purchases stock in the acquisition of control of a corporation owning such other property, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property or such stock.

The insurance proceeds reduce the casualty loss under 165.

The roof was converted to money (involuntary conversion via insurance proceeds). There is no gain since it's less than the replacement property. 

Involuntary Conversions I.R.C. Section 1033 (wm.edu)


26 U.S. Code § 1033 - Involuntary conversions | U.S. Code | US Law | LII / Legal Information Institute (cornell.edu)

(2)Trade or business and investment property

If a taxpayer’s property held for productive use in a trade or business or for investment is located in a disaster area and is compulsorily or involuntarily converted as a result of a federally declared disaster, tangible property of a type held for productive use in a trade or business shall be treated for purposes of subsection (a) as property similar or related in service or use to the property so converted.

The casualty loss is for property under 165.

The replacement of the casualty loss property is under 1033.

The insurance proceeds simultaneously reduce the loss under 165 while acting to create basis in the replacement property that will be recovered over future periods under 1033.

It's an involuntary conversion to dissimilar property.

The 16.5 is all used on the roof so there are no excess proceeds leading to gain.

The basis of the new roof is the adjusted basis of the old roof less unused proceeds plus gain recognized.

Basically safe harbors would allow the 16.5 to be the decline in FMV.

§ 1.1033(b)-1 Basis of property acquired as a result of an involuntary conversion.

(a) The provisions of the first sentence of section 1033(b) may be illustrated by the following example:

Example:A's vessel which has an adjusted basis of $100,000 is destroyed in 1950 and A receives in 1951 insurance in the amount of $200,000. If A invests $150,000 in a new vessel, taxable gain to the extent of $50,000 would be recognized. The basis of the new vessel is $100,000; that is, the adjusted basis of the old vessel ($100,000) minus the money received by the taxpayer which was not expended in the acquisition of the new vessel ($50,000) plus the amount of gain recognized upon the conversion ($50,000). If any amount in excess of the proceeds of the conversion is expended in the acquisition of the new property, such amount may be added to the basis otherwise determined.

 No it would be the amount actually paid or incurred of 430k. 

I doubt the entire amount has the same depreciable class, method, and convention though, or is placed in service at the exact same time.

 No, by default personal living expenses are non-deductible under 280A.

They might be capitalized to the basis potentially and reduce later gain or increase depreciable basis.

 I agree this will be treated as inventory - property held for the sale to customers in the ordinary course of trade or business.

All amounts are capitalized to inventory and recovered in the year of disposition.

On top of that your gains are ordinary.

Even though amounts are capitalized, it is not a capital asset.