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FAQs for Hurricane Victims - FEMA Payments

FAQs for Victims of Hurricanes Katrina, Rita and Wilma, Victims of the May 4, 2007, Kansas Storms and Tornadoes, and Victims of the Midwestern Area Disasters of 2008

(03/09) Q: An individual whose principal residence is damaged or destroyed by Hurricane Katrina, the May 4, 2007 Kansas Storms and Tornadoes, and the Midwestern Disasters of 2008 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?

A: 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.

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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.

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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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Page Last Reviewed or Updated: 06-Aug-2014