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When Your Home Is Destroyed

OPINION ORLANDO

By Orlando Gotay

I never thought I would write about this, but I must. Recent disasters raise a very real scenario: your home in Mexico is destroyed.

The taxman comes as you receive insurance money for the loss of the house. US tax law considers this to be an involuntary conversion. Imagine some type of forced sale.

Is the settlement taxable? If the home was your principal residence, and you lived in it long enough, you may be eligible for the optional exclusion of gain on the sale of principal residences, just as if you had sold it (up to $500k/married or $250k/single). That exclusion is the same one that people use when they sell their homes normally.

If you have gain in excess of the maximum exclusion (or if for some reason the exclusion does not apply to you), it may be either taxable right away or it can be postponed. It all depends on what you do.

If you acquire replacement property within a specific period of time, gain on these situations may be postponed to the day you eventually sell it. Generally, that clock to acquire the replacement starts the day you get the insurance check. The two-year clock stops on the second anniversary of that tax year. Replacement property must be of a type similar to the one being replaced. Houses in foreign locations are not similar to those in the US, so plan accordingly.

Disaster areas proclaimed by the US President often get longer (three-, four-, or five-year) replacement periods, but those are, as you may expect, only in the US. A Mexico disaster area would not benefit, leaving you with the default two-year period.

Mexico recently issued special decrees providing relief connected to the recent earthquakes. Aside from extensions of time to pay taxes, it also provides for an immediate deduction of amounts spent in the acquisition of new, fixed assets in affected areas, so long as the acquisitions are done by March 31, 2018, net of insurance payments received for destroyed properties.

The lesson here: a disaster may unleash the built-in gain on your home (or other capital assets) at the worst possible time. There is some relief from the sale, but you must know what to do. I pray you never have to resort to needing this relief. Stay safe out there.

Orlando Gotay is a California-licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the US Tax Court, and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of US expats in Mexico. He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.

 

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