Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 40 - Determination of Net Income › Rule 701-40.69 - Exclusion of Ordinary or Capital Gain Income Realized as a Result of Involuntary Conversion of Property Due to Eminent Domain

Current through Register Vol. 47, No. 3, July 24, 2024
For tax years beginning on or after January 1, 2006, a
				  taxpayer may exclude the amount of ordinary or capital gain income realized as
				  a result of the involuntary conversion of property due to eminent domain for
				  Iowa individual income tax. Eminent domain refers to the authority of
				  government agencies or instrumentalities of government to requisition or
				  condemn private property for any public improvement, public purpose or public
				  use. The exclusion for Iowa individual income tax can only be claimed in the
				  year in which the ordinary or capital gain income was reported on the federal
				  income tax return.
In order for an involuntary conversion to qualify for this
				  exclusion, the sale must occur due to the requisition or condemnation, or its
				  threat or imminence, if it takes place in the presence of, or under the threat
				  or imminence of, legal coercion relating to a requisition or condemnation.
				  There are numerous federal revenue rulings, court cases and other provisions
				  relating to the definitions of the terms "threat" and "imminence," and these
				  are equally applicable to the exclusion of ordinary or capital gains realized
				  for tax years beginning on or after January I, 2006.
(1)
Reporting requirements.
In order to claim an exclusion of ordinary or capital gain income realized as a
				result of involuntary conversion of property due to eminent domain, the
				taxpayer must attach a statement to the Iowa individual income tax return in
				the year in which the exclusion is claimed. The statement should state the date
				and details of the involuntary conversion, including the amount of the gain
				being excluded and the reasons why the gain meets the qualifications of an
				involuntary conversion relating to eminent domain. In addition, if the gain
				results from the sale of replacement property as outlined in subrule 40.69(2),
				information must be provided in the statement on that portion of the gain that
				qualified for the involuntary conversion.
(2)
Claiming the exclusion when gain
				is not recognized for federal tax purposes.
For federal tax purposes,
				an ordinary or capital gain is not recognized when the converted property is
				replaced with property that is similar to, or related in use to, the converted
				property. In those cases, the basis of the old property is simply transferred
				to the new property, and no gain is recognized. In addition, when property is
				involuntarily converted into money or other unlike property, any gain is not
				recognized when replacement property is purchased within a specified period for
				federal tax purposes.
For Iowa individual income tax purposes, no exclusion will be
				  allowed for ordinary or capital gain income when there is no gain recognized
				  for federal tax purposes. The exclusion will only be allowed in the year in
				  which ordinary or capital gain income is realized due to the disposition of the
				  replacement property for federal tax purposes, and the exclusion is limited to
				  the amount of the ordinary or capital gain income relating to the involuntary
				  conversion. The basis of the property for Iowa individual income tax purposes
				  will remain the same as the basis for federal tax purposes and will not be
				  altered because of the exclusion allowed for Iowa individual income tax.
Example: In 2007, taxpayer sold some farmland as a result of
				  an involuntary conversion relating to eminent domain and realized a gain of
				  $50,000. However, the taxpayer purchased similar farmland immediately after the
				  sale, and no gain was recognized for federal tax purposes. Therefore, no
				  exclusion is allowed on the 2007 Iowa individual income tax return. In 2009,
				  taxpayer sold the replacement farmland that was not subject to an involuntary
				  conversion and realized a total gain of $70,000, which was reported on the 2009
				  federal income tax return. The taxpayer can claim a deduction of $50,000 on the
				  2009 Iowa individual income tax return relating to the gain that resulted from
				  the involuntary conversion.
This rule is intended to implement Iowa Code section
				  422.7.