In Pacific Palisades, neighborhoods were left devastated on January 30th after the Palisades fire destroyed homes and properties. An individual wrote seeking advice as their house had burnt down in the fire after residing in it for 25 years and losing all their possessions. Expecting potential tax deductions, they were surprised to learn that their adjusted cost basis had to be the purchase price from 25 years ago, leading to a situation where the insurance settlement would exceed this cost basis, resulting in a "casualty gain." The individual asked if this circumstance was possible.

In such scenarios of property destruction with insurance payouts surpassing the tax basis, it is considered an "involuntary conversion" by the IRS. Mark Luscombe, a principal analyst with Wolters Kluwer Tax & Accounting, explained that to defer tax on the gain, the insurance funds must be used to rebuild or purchase a replacement property. Typically, there is a two-year period to reinvest the insurance proceeds, but in federally declared disasters like the Los Angeles fires, the timeframe is extended to four years. Under certain conditions, such as contractor delays, the IRS might further prolong the deadline, but extensions may not be granted if a replacement property cannot be found.

If another property is purchased, any gain from selling the lot where the previous home was located must also be reinvested in the new property to avoid immediate taxation on the gain. Luscombe noted that the home sale tax exclusion is also applicable to involuntary conversions, permitting individuals to shelter gains up to $250,000 ($500,000 if married filing jointly) if they have owned and resided in the property as their primary residence for two of the last five years. Individuals in such situations should seek guidance from a tax professional due to the complexities involved.

Regarding the appointment of an executor for a revocable living trust, a person inquired about whether their daughter could hire entities using trust funds to fulfill her duties if she lacked the necessary capabilities. It was clarified that since the individual had a living trust, their daughter's role would be that of a "successor trustee" tasked with managing the trust per the terms outlined in the document.