I have a client that owns a residential rental property that was substantially destroyed in the fire. The client retains ownership of the property but also received insurance proceeds greater than the cost of the property.
The question is if they sell the destroyed property, do they still qualify under the involuntary disposition?
Has anyone seen a situation like this, the client wants to replace the property but I cannot find a court case that defines if the sale still falls under involuntary.
My recollection is that these rules only apply to business properties; not a residential property. On further thought, my experience has been in voluntary sales; not involuntary.
The insurance proceeds would constitute an involuntary disposition and as @obhorst has mentioned, the replacement property regulations contained in subsections 13(4) and 44(1) would apply to involuntary dispositions of capital property. My understanding is property does not need to be a business property if it is an involuntary disposition.
The question here though… does the actual sale of the burned up property after receiving the insurance proceeds constitute a voluntary or involuntary disposition at that point in time. As @kevin mentioned the replacement property rules only apply to business properties in the case of a voluntary disposition. A rental property would not qualify.
My gut feeling would suggest you could likely get away with calling the entire disposition (insurance proceeds and sale) as an involuntary disposition… but I don’t have anything to support my position.