Tornado destroyed home

[thomtax]

Our community recently had a large number of homes & business buildings destroyed by a tornado, so this is probably just the first of many odd situations.

Situation:
Home completely destroyed by tornado.
5 years ago the parents put the home into the name of their children and continued living in home.
Parents continued paying the insurance premiums and kept the insurance in their name.
Insurance company paid $62,000 to the parents for destroyed house.
Parents are purchasing another home that costs $70,000.

I would appreciate any observations and/or thoughts about any and all facets of this situation. I have some thoughts, but many of them are filled with doubts. Plus I have possibly overlooked something obvious.

Additional situation that will come later:
The lot will be sold after the house is cleared off. Since it is in the name of the children, I assume that this will be income to them.

Thanks to all.

LT

[Nashville]

Title

Thom, is the TITLE actually in the name of the children, is it one of those "living trust" deals, some of which IRS considers a non-entity? One hint is whether the parents have the right to live in the house for the remainder of their lives, or whether the children actually have the right to kick them out. (Not suggesting that this would happen, only if the right exists)

I believe if the children actually have the title, your presumption is correct that it would be reportable by the children (if at all). This could also be an "involuntary conversion" for property that is not the owner's principle residence.

[thomtax]

Thanks for the reply.

I have requested further info from the client about the possibility that there was a clause giving parents rights to live in the home. But she did say at the time of the phone call that the title actually changed ownership.

LT