You may avoid tax on the gain by using the proceeds to buy replacement property within a set time limit. You can, for example, buy similar rental property and instead of reporting the gain, you adjust the tax basis of the new rental property. (The tax law requires that the replacement property be similar or related in service or use to the property that has been involuntarily converted.) The basis adjustment will ensure that the gain is ultimately taxed when you sell the new rental property. However, you must act no later than 2 years after the close of the year in which you have the tax gain.
Items, such as interest, state and local income and sales taxes, charitable contributions, and medical deductions, claimed on Schedule A of Form 1040. Itemized deductions are subtracted from adjusted gross income to arrive at taxable income. The amount of itemized deductions is also subject to a reduction when adjusted gross income exceeds certain limits.