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 federally 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 two years after the close of the taxable year in which the gain is realized. However, if the damaged property is in a federally declared disaster area, the replacement period is four years. If the damaged property is located in the New York Liberty Zone, Hurricane Katrina Disaster Area, areas impacted by the May 4, 2007, Kansas storms and tornadoes, or the Midwestern area disasters of 2008, the replacement period is five years, but only if substantially all of the use of the replacement property is in the above-referenced disaster areas, 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.