Form 4797 Involuntary conversion due to disaster - the Camp Fire of 11/08/2018

[peggymoak]

I received a settlement through the CA Fire Victims Trust for damages to my real property during the 2018 Camp Fire, which is a combination of a residential rental on about 2 acres, and a farm operation of 40 acres, mostly for grazing goats and cattle. The settlement was for burn damages to the property, numerous trees had to be removed, stump holes filled in, brush cut, piled and burned, and it took several years to get it all done. I had some issues with the settlement details, so held off on the processing of this portion of the claim for a while. I signed the paperwork on 11/29/2023, and received a check on January 3, 2024.  My first question is whether I should include this for 2023 income, because I could have received it in 2023 had I signed earlier, or is it for 2024 income? 

Second:  I am confused about where to enter the info for form 4797.  This was or is in a Federally declared Disaster, but I am unsure whether it still is a Qualified Disaster Area for purposes of tax reporting.  I have legal fees amounting to 25% of the settlement - do those go on Farm Expenses or as expenses against the involuntary conversion (sale) of the real property?

Third:  I understand I can replace the property in 2024 with a like service real property, which is underway via construction of a barn which will be completed in 2024. But I cannot figure out where to put all this information on the form 4797, or how to find it in the step-by-step process. 

[Mike9241 · Accepted solution]

Federally declared Disaster losses are reported on form 4684 for both personal and business property. 

from IRS PUB 547

Disaster year. The disaster year is the tax year in which
you sustained the loss attributable to a federally declared
disaster. Generally, a disaster loss is sustained in the year
the disaster occurred. However, a disaster loss may also
be sustained in a year after the disaster occurred. For ex
ample, if a claim for reimbursement exists for which there
is a reasonable prospect of recovery, no part of the loss
for which reimbursement may be received is sustained until

it can be ascertained with reasonable certainty whether
you will be reimbursed.
When to deduct the loss. You must generally deduct a
casualty loss in the disaster year. However, if you have a
casualty loss from a federally declared disaster that occur
red in an area warranting public or individual assistance
(or both), you can elect to deduct that loss on your return
or amended return for the tax year immediately preceding
the disaster year. If you make this election, the loss is trea
ted as having occurred in the preceding year. A list of
areas warranting public or individual assistance (or both)
is available at the FEMA website at
FEMA.gov/Disasters.
You must make the election to take your casualty loss
for the disaster in the preceding year on or before the date
that is 6 months after the regular due date for filing your
original return (without extensions) for the disaster year. If
you are a calendar year taxpayer, you have until October
15, 2024, to amend your 2022 tax return to claim a casu 

note the words 

no part of the loss
for which reimbursement may be received is sustained until

it can be ascertained with reasonable certainty whether
you will be reimbursed. That's the year for the deduction.

you may want to consult a tax pro to get guidance to when this occurred because that's the tax year to report it.