As it turns out what I had originally shared stating that the replacement animal needed to be the same sex as the animal it is replacing is not the case. You can replace the animal with either sex. It only states it must be the same species. You can't replace an alpaca with a dairy cow; but you can replace a herdsire with a female. Treasury Regulations Sec. 1.1033(a)-2 states the replacement property must be similar or related in service or use. It does not state they must be the same sex. The provisions of this section are not as strict as the like-kind exchange rules found under IRC Section 1031. The reason for the leniency is one (like-kind exchange) is planned and the loss of your animal is not.
Additionally, IRC Section 1033(a)(2)(A)(i) states property you own (alpacas in our case) can be the replacement property for the lost animal if they are owned by you on the date of death of the animal you are replacing. For example, in addressing the loss of our female, Athena. We can look at the tax basis of any of the alpacas we owned as of July 16th and apply any gain to the basis of as many animals as we need to absorb the gain. The gain will ultimately be realized upon the sale of each of the alpacas we used as replacement property.
The details of the replacement must be included in your tax return within two tax years of the death of the animal. If no replacement is made then an amended return for that year is required.
Hope this clarification helps when you have to face this difficult time.
As posted on July 24th:
Filling out insurance papers and reviewing necropsy results with our vet just got me thinking that what happened last week will happen to all of us sooner or later--we all hope for later--we lost our first adult alpaca on the farm on Wednesday, July 16th. We have lost crias before--and that is not any less painful--but I haven't had four years of experience with that wonderful little creature as I did with Athena. We have lost adult alpacas in the past but they have always been at one of our clients' farms--like Wilson or King Arthur. Shocking and very upsetting when you hear about it--but not right in front of you. Athena was not the most gorgeous girl on the block--some might think down right ugly by some standards--but she was a great mom and the Studmasters she was bred to helped to create some beautiful crias.Some of our friends and clients have also had some losses this year so I thought it might be a good time to share the tax impact of the loss under a variety of different scenarios.
In our example we will assume the following:
The purchase price: $20,000
Depreciation taken to date: $8,100
Net book value of $11,900 ($20,000 less $8,100)
Net book value of $11,900 ($20,000 less $8,100)
There was no insurance on the animal
The difference between the cost and the depreciation taken to date (net book value) is your taxable loss. The actual accounting entries to remove the asset from your accounting records would be
Debit - Gain/Loss on death of alpaca for $11,900
Debit - Accumulated Depreciation for $8,100 (zeros out the prior activity for this alpaca)
Credit - Breeding Herd (zeros out the original purchase of the alpaca)
If the animal was part of a note payable when the animal passes then you will be covered by insurance (as all contracts require that the animal be insured during the entire term of the loan). The only difference in treatment compared with the entry above reflects the insurance proceeds received. So if the animal was insured for $20,000 your entry would look like this:
Debit - Note Payable (and/or Cash) for $20,000
Credit - Gain/Loss on death of alpaca for $20,000
When you look at the activity in each of the accounts you would see that the asset accounts have been zeroed out and only the Gain/Loss account has a credit balance of $8,100 (net of the debit of $11,900 and the credit of $20,000). This gain is taxable unless you purchase a replacement animal within the two year time allowed. A replacement animal is an animal of the same species and same sex used for the same purpose.
You can postpone reporting the gain if you spend the reimbursement to replace the animal. To postpone reporting all the gain, the cost of the 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. In our example you received insurance proceeds of $20,000, if you replaced the alpaca with a similar animal but only spent $18,000 you would need to report a gain of $2,000. Depending on the timing of the replacement purchase you may have to amend the return for the year of loss.
Please let me know if you have questions on how this actually shows up on your return--and also let me know if I have completely confused you. Bottomlime--It is the one time you feel good about your decision to pay those insurance premiums.
