Revenue Ruling 96-32

In September of 1991, A’s principal residence was destroyed by a tornado that was a presidentially declared disaster. A, whose adjusted basis in the property was $100x (with x being an unspecified multiplier), received $120x in insurance proceeds. Rather than rebuilding the residence, A sold the land for $10x in 1993. A then purchased a new principal residence for $130x in March of 1995. In a separate situation, B’s principal residence was destroyed by an earthquake in December of 1991. The earthquake caused widespread destruction, leading to a shortage of supplies and labor. B’s home was reconstructed in October of 1994, at which point B moved from rental housing back into the residence. A’s and B’s residences were subject to mortgages, and the parties continued to pay mortgage principal and interest between the destruction of their residences and the respective sale or reconstruction of their properties. A’s and B’s situations raised tax questions: (1) whether A’s land sale two years after A’s residence was destroyed should be treated as part of the involuntary conversion of A’s property for purposes of 26 U.S.C. § 1033 and (2) whether A’s and B’s interest payments after their residences were destroyed continued to constitute deductible qualified residence interest under 26 U.S.C. § 163. The Internal Revenue Service issued a revenue ruling to answer those questions.