[StBernard] LRA Taxability

Westley Annis westley at da-parish.com
Thu Sep 21 22:30:01 EDT 2006


Updated IRS information:

(9/18/06) Q: How do individuals treat grants in the maximum amount of
$150,000 that the Louisiana Recovery Authority (LRA) and the Mississippi
Development Authority (MDA) make to compensate them for the damage to or
destruction of their primary homes by Hurricane Katrina?

A: Individuals who received grant payments from the LRA and the MDA to
compensate them for the damage to or destruction of their primary homes by
Hurricane Katrina generally will not be required to include the grant
proceeds in gross income.

The recipient of the LRA or MDA grant payment must reduce the amount of any
casualty loss attributable to the damaged or destroyed primary residence by
the amount of the LRA or MDA grant payment. In addition, the recipient must
reduce his or her tax basis in the damaged or destroyed primary residence by
the amount of the LRA or MDA grant payment as well as by the amount of the
allowable casualty loss deduction attributable to the damaged or destroyed
primary residence. If the recipient repairs the damaged primary 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; Publication 551, Basis of Assets; Publication 4492, Information
for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma; and, for
taxpayers affected by Hurricane Katrina, Form 982, Reduction of Tax
Attributes Due to Discharge of Indebtedness (and Section 1082 Basis
Adjustment).

If the LRA or MDA grant payment to compensate for damage to or destruction
of the primary residence 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
the LRA or MDA grant to compensate for damage to or destruction of the
primary residence 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 primary 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 Publications 547 and 4492, and Form 4684 and Instructions.

The recipient of LRA or MDA grant payments to compensate for the damage to
or destruction of the primary residence (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.

Dan Johnson
Certified Public Accountant
257 W Causeway Approach
Mandeville, LA 70448
985-626-1102 Voice
985-727-0834 Fax




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