An individual whose principal residence is damaged or destroyed by Hurricane Katrina receives a FEMA IHP Repair Assistance or Replacement Assistance payment and/or insurance proceeds that exceed his or her adjusted tax basis in the damage or destroyed principal residence.
How is this treated for federal income tax purposes?
If the FEMA IHP repair assistance or replacement assistance payment and/or insurance proceeds (and any other form of compensation for the damaged or destroyed residence) exceed the recipient’s adjusted tax basis in the damaged or destroyed residence, the recipient has realized gain for federal income tax purposes. However, because the damage or destruction is considered an “involuntary conversion” of the residence for federal income tax purposes, the recipient may ordinarily defer reporting any gain if the cost of the repairs or the replacement residence is at least as much as the compensation received for the damage (including any FEMA IHP repair assistance or replacement assistance payment and/or insurance proceeds), and if certain other conditions are met. For more information, see Publication 547, Casualties, Disasters, and Thefts; Publication 4492, Tax Information Related to Hurricane Katrina; and Form 4684, Casualties and Thefts, and Instructions.
If the principal residence is destroyed, the destruction may be treated as a sale for purposes of the tax provisions governing the exclusion of gain from the sale of a principal residence, and gain may be excluded up to $250,000 ($500,000 for certain situations involving joint returns), if certain conditions are met. Additionally, because the destruction is considered an involuntary conversion of the residence, any gain in excess of the $250,000/$500,000 limitation may also be deferred by buying similar or related replacement property, if certain conditions are met. For more information, see Publication 547 and 4492 , and Form 4684 and Instructions.
The recipient of a FEMA IHP repair assistance payment or replacement assistance payment (and any other compensation for the damaged or destroyed residence) must reduce his or her “cost” basis in any replacement residence by the amount of any deferred gain from the damaged or destroyed residence
If the principal residence is destroyed, the destruction may be treated as a sale for purposes of the tax provisions governing the exclusion of gain from the sale of a principal residence, and gain may be excluded up to $250,000 ($500,000 for certain situations involving joint returns), if certain conditions are met. Additionally, because the destruction is considered an involuntary conversion of the residence, any gain in excess of the $250,000/$500,000 limitation may also be deferred by buying similar or related replacement property, if certain conditions are met. For more information, see Publication 547 and 4492 , and Form 4684 and Instructions.
The recipient of a FEMA IHP repair assistance payment or replacement assistance payment (and any other compensation for the damaged or destroyed residence) must reduce his or her “cost” basis in any replacement residence by the amount of any deferred gain from the damaged or destroyed residence
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