The Deemed
Election Trap.

Of all the Eaton Fire families I'm connected to — more than twenty personally, many more professionally — the ones I worry about most are not the ones asking questions. It's the ones who think they have nothing to report.

My parents' house in Sierra Madre got smoke damage and they nearly evacuated permanently. When I started talking with families who did lose their homes, I noticed a pattern quickly: many of them assumed that because they felt like they'd lost everything financially, there must be no gain to report. Insurance paid out. It didn't feel like income. Nobody told them otherwise.

What most advisors miss in these situations is that "I got insurance money" and "I have no gain" are not the same statement. If you bought your Altadena home in 1998 for $320,000 and your insurance paid out $1.1 million, you have a gain — potentially a large one — even after applying the §121 exclusion. And if you didn't report it, a clock started running on you in January 2025 that you may not even know about.

What Is the Deemed Election Under IRC Section 1033?

Here's where it gets counterintuitive. Under §1033, a taxpayer who has an involuntary conversion gain has two options: recognize the gain and pay the tax, or elect to defer it by reinvesting in qualified replacement property. Normally, you make that election consciously — you file a statement with your return and track your replacement spending.

But what happens if you just don't report the event at all?

The IRS treats silence as an implicit deferral election. This is the deemed election — and it has four mechanics that combine into a serious trap:

The deemed election is dangerous precisely because it feels like nothing. You didn't do anything wrong. The IRS did something to you. The clock is running. The SOL protection you think you have doesn't exist. And the bill, when it arrives, goes back to 2025.

What Happens If I Don't Report My Eaton Fire Insurance Gain?

Here's how it plays out in real time for a typical Eaton Fire Lane 1 homeowner:

If that same taxpayer had simply filed a §1033 election statement with their 2025 return, they would have had until December 2029 to reinvest — and the entire $300,000 gain could have been deferred completely. The election statement is a single paragraph of disclosure text. The failure to file it is the entire problem.

How Long Do I Have to Replace My Destroyed Home After the Eaton Fire?

The replacement periods vary significantly by property type — and this is where many people get into trouble by applying the wrong rule to their situation:

Extensions are available but must be requested before the statutory period expires — not after. They are granted one year at a time and require a showing that the delay was reasonable. Don't let the deadline pass and then ask.

Does the Statute of Limitations Apply to Unreported Involuntary Conversion Gains?

No — and this is the piece that genuinely surprises people when I explain it.

The standard three-year SOL exists to protect taxpayers whose returns have been filed. It applies to reported items. An unreported involuntary conversion gain has never been placed on a return, which means the SOL has never begun running. The IRS can reach back to 2025 indefinitely.

There is also a separate extended SOL for involuntary conversion cases under the replacement period rules: even on properly filed returns, the IRS retains examination authority over all years connected to the conversion event until three years after the final return reporting completion of the replacement is filed. This means your 2025, 2026, 2027, and 2028 returns may all remain open for examination long after you think the ordinary SOL has run.

The practical implication: document everything. Every insurance payment, every election statement, every replacement expenditure. The paper trail from January 2025 through the final replacement year is all potentially relevant to an audit you may face years from now.

Frequently Asked Questions