An involuntary conversion refers to property that is destroyed, stolen, condemned, or disposed of under threat of condemnation. As mentioned above, in the case of involuntary conversions resulting from casualties (such as storms or fire) or theft, Form 4684 may need to be filed.
Condemnations
A gain or loss from an involuntary conversion, such as a condemnation, is usually recognized for tax purposes, unless the property is your main home. The condemnation would effectively be treated as a forced sale. To determine whether you have a gain or loss from a condemnation, you would subtract your adjusted basis in the property from the amount of the net condemnation award. If the net condemnation award is more than your adjusted basis, you have a gain. You can postpone recognition of the gain for tax purposes by purchasing replacement property. If the net condemnation award is less than your adjusted basis, you have a loss. If you held the property for personal use, the loss is not deductible.
If the property condemned was your home, and you had a gain on the condemnation, you can exclude the gain to the same extent you could have excluded it if you had sold or exchanged your home.