Exclusion of Capital or Ordinary Gain Income From Involuntary Conversion Relating to Eminent Domain

Prior Law

Income reported as capital or ordinary gain on the federal income tax return are also subject to Iowa income tax unless the capital gain exclusion under section 422.7, subsection 21, is applicable. This exclusion involves capital gain from the sale of real property used in a business or from the sale of the business, as long as the taxpayer materially participated in the business for a minimum of 10 years and which has been held by the taxpayer for 10 years.

New Provisions

A new exclusion of both capital gain and ordinary gain is available for individual and corporation income taxpayers relating to capital or ordinary gain income realized by a taxpayer as a result of the involuntary conversion of property due to eminent domain. Eminent domain relates to the authority of certain government agencies or instrumentalities of government to condemn private property for any public improvement, public purpose, or other public use.

If there is no ordinary or capital gain recognized for tax purposes because the converted property is replaced with property that is similar to, or related in use to, the converted property, there is no exclusion allowed for Iowa tax purposes until the remaining gain is recognized for federal tax purposes or until the time of disposition of the replacement property. Any exclusion allowed for Iowa tax purposes does not alter the basis of the property as established for federal tax purposes, so the basis will remain the same for both federal and Iowa tax purposes.

In addition, if a taxpayer erroneously reported the capital or ordinary gain income from the involuntary conversion on the Iowa return and the taxpayer subsequently reacquires the same property, the statute of limitations to claim a refund is extended. This claim can be filed prior to the end of the sixth month following the month in which the reacquisition occurs, even if the normal three year statute of limitations has expired.

Section Amended

Section 41 of House File 2351 amends section 422.7, Code Supplement 2005, by adding new subsection 45. Section 42 amends section 422.35, Code Supplement 2005, by adding new subsection 22. Section 43 amends section 422.73, Code 2005, by adding new subsection 43.

Effective Date

The exclusion of capital and ordinary gain income from an involuntary conversion applies retroactively to January 1, 2006, for tax years beginning on or after that date. The extended statute of limitations for refund takes effect upon enactment, which is July 14, 2006, and applies to reacquisitions of property occurring on or after that date.