Q: Are mitigation payments under Code Section 139 tax free?
A: Qualified disaster relief payments are excludable from the recipient's income. Such payments are amounts paid under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) to or for the benefit of the owner of any property for hazard mitigation. There is no resulting increase in the basis or adjusted basis of the property for which the payments are made. Also, no person for whose benefit a qualified disaster relief or mitigation payment is made is allowed to take a deduction or credit due to an expenditure for which exclusion for a payment is granted. The exclusion does not apply to amounts received for the sale or disposition of property.
Q: Do you have to subtract FEMA payments in arriving at the calculation for your net casualty loss?
A: According to page 6 of Publication 547, food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. In calculating your casualty loss, if the payment is for replacement of lost or destroyed property, then you would subtract the amount in figuring your casualty loss.
Q: How are FEMA "Individuals and Households Program" payments treated for income tax purposes?
A: Under the Individuals and Households Program (IHP), FEMA provides grant payments to individuals for critical expenses and losses, not covered by insurance or in other ways that are incurred as a result of a federally declared disaster. FEMA makes the following types of payments under the program:
Temporary Housing Assistance: To rent a different place to live or a government provided housing unit when rental properties are not available.
Repair Assistance: For homeowners to repair damage from the disaster to their primary residence that is not covered by insurance. The goal is to make the damaged home safe, sanitary, and functional.
Replacement Assistance: For homeowners to replace their primary residence destroyed in the disaster that is not covered by insurance.
Other Needs Assistance: For necessary expenses and serious needs caused by the disaster, such as medical, dental, funeral, personal property, transportation, moving, and storage.
In general, FEMA IHP payments received by eligible individuals for any of the above purposes are excluded from his or her gross income for federal income tax purposes to the extent that the expenses compensated for by the IHP payments are not compensated for by insurance or otherwise.
The recipient of a FEMA IHP repair assistance payment or replacement assistance payment must reduce the amount of any casualty loss attributable to the damaged or destroyed residence by the amount of the FEMA IHP payment. In addition, the recipient must reduce his or her tax basis in the damaged or destroyed residence by the amount of the FEMA IHP repair assistance payment or replacement assistance payment, as well as by the amount of the allowable casualty loss deduction attributable to the damaged or destroyed residence. If the recipient repairs a damaged residence, the cost of repairs ordinarily is capitalized and added to the recipient’s tax basis in the damaged residence. For more information on determining your adjusted basis, see Publication 530, Tax information for First-Time Homeowners and Publication 551, Basis of Assets.
Also, in general, the recipient of a FEMA IHP payment for reimbursement of a medical (including dental) expense must reduce the amount of his or her medical expenses by the amount of that FEMA IHP payment to determine the amount of any medical expense deduction. However, if the individual receives the FEMA IHP payment in a later year for reimbursement of medical expenses deducted in an earlier year, the individual generally must report the reimbursement as income up to the amount previously deducted as medical expenses. For more information, see Publication 502, Medical and Dental Expenses.
Q: An individual whose principal residence is damaged or destroyed by a disaster receives a FEMA IHP repair assistance or replacement assistance payment and/or insurance proceeds that exceed his or her adjusted tax basis in the damaged 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. For more information, see:
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 4492-A, Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes
- Form 4684, Casualties and Thefts
- Form 4684, 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.