From: trader4@optonline.net
Newsgroups: misc.consumers.house
Subject: Re: Insurance claim paid, but damage not repaired question
Date: 13 Apr 2005 09:30:08 -0700
   posting-account=vW3O0AwAAABxQqAj-ZYxYAKqrqLQW3tX


"the irs feels that if you don't rebuild, you received income from the
insurance check.   bet it also applies to car insurance checks, since
personal-use property isn't necessarily real estate. "


Even the IRS doesn't expect to tax you twice on money you already paid
tax on.    In the case of a car, if it was damaged and you get an
insurance payment, you don't owe tax on it, unless the payment was for
more than the car was actually worth, which I've never seen happen.

In fact, quite the opposite is true.  Let's say a car was worth $8k and
you can prove it through reasonable means, eg blue book, etc.  But the
insurance company only pays you 6.5K.  You not only don't owe tax on
the $6.5K, but you have a legitimate $1.5K deductible casualty loss, as
that is the fair market value minus the insurance received.  This
happens all the time.  What you are suggesting would require someone
who had a watch stolen for example, to go buy another watch, whether
they wanted one or not.  This isn't income, by any stretch of the
imagination, it's reimbursement for a loss.    Read the sections on
casualty loss.


Here from the IRS Topic 507 Casualty and Theft Losses:

"If your property is damaged by a casualty, you must decrease its
adjusted basis by the amount of any insurance or other reimbursement
that you receive and by the amount of any deductible loss. You must
increase the adjusted basis by amounts you spend on repairs after a
casualty that substantially prolong the life of the property, increase
its value, or adapt it to a different use."

As I read that, the net effect for 99% of homeowners with their home
garage damaged by a storm is no tax consequence at all and certainly
nothing that needs to be reported or filed in the year that it
occurred.  If you later sell the home and the gain exceeds $500K for a
married couple, then, and only then, if you didn't spend as much in
repairs as you received from the insurance company, you would owe
capital gains on it.


>From 4864:
Gain on Reimbursement
If the amount you receive in insurance or other reimbursement is more
than the cost or other basis of the property, you have a gain. If you
have a gain, you may have to pay tax on it, or you may be able to
postpone the gain.


The sections you're referring to in JK Lassiter are relevant to
postponing a gain.  That would have relevance here if the fellows
entire house was destroyed and he didn't rebuild/replace it.  Then he
might have a capital gain, if the insurance payment, minus his basis,
was over $500K.   The treatment would be similar to having sold it for
the insurance amount.