Involuntary Gains

Generally, involuntary gains from insurance proceeds can be avoided if property for principal residences within presidential declared disaster areas are replaced within four years. Businesses normally have two years to reinvest in property to avoid the gain. Katrina legislation has extended this period for both personal and businesses to five years.

For both individuals and businesses, the replacement property must be located in the Katrina disaster area.

Smart tax planning will allow taxpayers to claim the loss deduction on the year that will provide the smallest tax liability overall. Filing a 2004 amended return may help the taxpayer get the money faster, but waiting until 2005 might actually yield a lower overall tax liability. Determining which year to claim the deduction will have to be determined on a case-by-case basis.

Form 4684 will be revised to accommodate the new rules for qualified Hurricane Katrina losses. Losses from Hurricane Katrina will be calculated on Form 4684 separately from non-Hurricane Katrina losses and added to the total to be carried to the Schedule A.

From December 2005

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