State has taken taxpayers land and is paying taxpayers relocation fees in addition to what it paid to take there land and home. Would relocation expenses be taxable??
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Found in Publication 523
Involuntary conversion: If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. If you acquired a replacement home
with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in:
Publication 547, in the case of a home that was destroyed, or
Chapter 1 of Publication 544 , in the case of a home that was condemned.
Example. A fire destroyed your home that you owned
and used for only 6 months. The home had an adjusted
basis of $80,000 and the insurance company paid you $130,000 for the loss. Your gain is $50,000 ($130,000 -$80,000). You bought a replacement home for $100,000. The part of your gain that is taxable is $30,000 ($130,000 -
$100,000), the unspent part of the payment from the insurance company. The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home
The basis of the new home is figured as follows.
Cost of replacement home . . . . . . . . . . . . . . . $100,000
Minus: Gain not recognized . . . . . . . . . . . . . . 20,000
Basis of the replacement home $ 80,000
Based upon this information, as long as they purchased a replacement property, it appears they would reduce the basis of their new home.
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