Even IRS unsure of tax effects

The Answer Spot addresses your post-Katrina questions. To submit a question, send it to insuranceTAXES

We are buying a house in Lakeview and the house has Road Home money associated with it. The sellers are receiving the Road Home money and signing it over to us. We are agreeing to all the covenants associated with the grant. Do we, the buyers, have to pay the taxes on the Road Home money? We did not claim any losses on our previous tax return. Who is responsible for the taxes on this money?

That is a very good question, and one that we can not answer at this time. The IRS is still considering how to handle situations such as this one, so it is unclear what tax consequences you will face.

You have mentioned that the Road Home grant is subject to federal income tax if the grant receiver filed a casualty loss in 2005 after Hurricane Katrina. Could you point me to an IRS publication that describes the tax treatment of the Road Home grant? Furthermore, does Road Home issue a 1099 for the grant?

IRS Publication 525 contains a section that discusses situations in which you are recovering income from something you previously took a deduction for, which is the situation many Road Home grant recipients find themselves in. This discussion begins on page 20. To read this publication online, go to www.irs.gov/pub/irs-pdf/p525.pdf.

There is also additional information under the "Grant Proceeds" section of the Hurricane Katrina, Rita and Wilma Guidance on the Web site www.irs.gov/businesses/small/article/0, ,id=171341,00.html.

The Road Home program says that real estate transactions undertaken through Option 2 or 3, both of which involve the sale of your home, will generate a 1099, which is a tax document demonstrating that the seller of the property received income.

However, if you pursue Option 1 of the program, the option in which you stay in your home and rebuild, you will not receive a 1099 because no real estate transaction is taking place