FAQs for Disaster Victims - Realized Gain on Main Home |
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(6/4/07)Q: What are the rules for taxpayers who realize gain from receipt of insurance proceeds or other reimbursements for damage or destruction of a main home that is in a Presidentially declared disaster area?
A: If the taxpayer’s main home is damaged, a taxpayer may elect to postpone recognizing gain under the involuntary conversion rules by investing in property similar or related in service or use to the damaged property and meeting other requirements. Generally, the taxpayer must replace the damaged property within 2 years after the close of the taxable year in which the gain is realized. However, if the damaged property is in a Presidentially declared disaster area, the replacement period is 4 years. If the damaged property is located in the New York Liberty Zone or the Hurricane Katrina disaster area, the replacement period is 5 years, but only if substantially all of the use of the replacement property is in New York City or the Hurricane Katrina disaster area, respectively. The IRS may grant an extension of these periods if the taxpayer can show reasonable cause for not making the replacement within the regular period.
If the taxpayer’s main home 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. If certain conditions are met, the gain may be excluded up to $250,000 ($500,000 for certain situations involving joint returns). If the destruction exceeds the $250,000/$500,000 limitation, the excess gain may be deferred under the involuntary conversion rules.
For more information, see Publications 547 and 4492, and Form 4684 and Instructions.
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Page Last Reviewed or Updated: July 21, 2008