Replacement Property: Disaster and Theft Tax Relief (2025 IRS Guide)
This guide covers “Replacement Property” within disaster and theft tax relief. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.
Adapted from Publication 547 (2025), Casualties, Disasters, and Thefts, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.
Context for these rules
Don’t report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. Your basis in the new property is generally the same as your adjusted basis in the property it replaces.
You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. You can also choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. See Controlling interest in a corporation, later.
If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property.
To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement.
Replacement Property
You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. Property you acquire as a gift or inheritance doesn’t qualify.
You don’t have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. If you spend the money you receive from the insurance company for other purposes, and borrow money to buy replacement property, you can still postpone reporting the gain if you meet the other requirements.
Advance payment.
If you pay a contractor in advance to replace your destroyed or stolen property, you aren’t considered to have bought replacement property unless it is finished before the end of the replacement period. See Replacement Period, later.
Similar or related in service or use.
Replacement property must be similar or related in service or use to the property it replaces.
Timber loss.
Standing timber (not land) you bought with the proceeds from the sale of timber downed by a casualty (such as high winds, earthquakes, or volcanic eruptions) qualifies as replacement property. If you bought the standing timber within the specified replacement period, you can postpone reporting the gain.
Owner-user.
If you are an owner-user, “similar or related in service or use” means that replacement property must function in the same way as the property it replaces.
Example.
Your home was destroyed by fire and you invested the insurance proceeds in a grocery store. Your replacement property isn’t similar or related in service or use to the destroyed property. To be similar or related in service or use, your replacement property must also be used by you as your home.
Main home in disaster area.
Special rules apply to replacement property related to the damage or destruction of your main home (or its contents) if located in a federally declared disaster area. For more information, see Gains Realized on Homes in Disaster Areas, later.
Owner-investor.
If you are an owner-investor, “similar or related in service or use” means that any replacement property must have a similar relationship of services or uses to you as the property it replaces. You decide this by determining all of the following.
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Whether the properties are of similar service to you.
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The nature of the business risks connected with the properties.
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What the properties demand of you in the way of management, service, and relations to your tenants.
Example.
You owned land and a building you rented to a manufacturing company. The building was destroyed by a tornado. During the replacement period, you had a new building constructed. You rented out the new building for use as a wholesale grocery warehouse. Because the replacement property is also rental property, the two properties are considered similar or related in service or use if there is a similarity in all of the following areas.
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Your management activities.
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The amount and kind of services you provide to your tenants.
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The nature of your business risks connected with the properties.
Business or income-producing property located in a federally declared disaster area.
If your destroyed business or income-producing property was located in a federally declared disaster area, any tangible replacement property you acquire for use in any business is treated as similar or related in service or use to the destroyed property. The replacement property doesn’t have to be located in the federally declared disaster area. For more information, see Disaster Area Losses, later.
Controlling interest in a corporation.
You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your damaged, destroyed, or stolen property. You can postpone reporting your entire gain if the cost of the stock that gives you a controlling interest is at least as much as the amount received (reimbursement) for your property. You have a controlling interest if you own stock having at least 80% of the combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock.
Basis adjustment to corporation’s property.
The basis of property held by the corporation at the time you acquired control must be reduced by the amount of your postponed gain, if any. You aren’t required to reduce the adjusted basis of the corporation’s properties below your adjusted basis in the corporation’s stock (determined after reduction by the amount of your postponed gain).
Allocate this reduction to the following classes of property in the order shown below.
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Property that is similar or related in service or use to the destroyed or stolen property.
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Depreciable property not reduced in (1).
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All other property.
Main home replaced.
If your gain from the reimbursement you receive because of the destruction of your main home is more than the amount you can exclude from your income (see Main home destroyed under Figuring a Gain, earlier), you can postpone reporting the excess gain by buying replacement property that is similar or related in service or use. To postpone reporting all the excess gain, the replacement property must cost at least as much as the amount you received because of the destruction minus the excluded gain.
Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the destroyed property as your main home.
Basis of replacement property.
You must reduce the basis of your replacement property (its cost) by the amount of postponed gain. In this way, tax on the gain is postponed until you dispose of the replacement property.
Example.
A fire destroyed your rental home that you never lived in. The insurance company reimbursed you $67,000 for the property, which had an adjusted basis of $62,000. You had a gain of $5,000 from the casualty. If you have another rental home constructed for $110,000 within the replacement period, you can postpone reporting the gain. You will have reinvested all the reimbursement (including your entire gain) in the new rental home. Your basis for the new rental home will be $105,000 ($110,000 cost − $5,000 postponed gain).
Using the guidance
Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.
Sources and further reading
- Publication 547 (2025), Casualties, Disasters, and Thefts: Figuring a Gain — Postponement of Gain — Replacement Property — Internal Revenue Service; 2025 edition.
The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.