Casualty Loss Reimbursements

If your property loss was covered by insurance, you must submit a timely claim for reimbursement with the insurance company in order to deduct any casualty losses for property damage. The exception to this rule is that if your policy requires you to pay a deductible amount, this amount counts as a loss even if you don't file a claim.

Once you've determined the amount of your loss, you must subtract the value of the insurance reimbursements you received, to arrive at your deductible casualty loss. If the reimbursements are greater than your losses as calculated under IRS rules, you may actually have a gain as a result of the casualty.

Tip If your home suffers a loss and you are reimbursed on the basis of your home's appreciated value, but for tax purposes you can only claim the original cost of the home as a loss, you may experience a gain upon receiving the insurance money. You can generally avoid paying tax on the gain if you purchase qualified replacement property within two years.

Insurance payments are the most common form of reimbursement for casualty losses, but you will also have to count any condemnation awards, disaster relief grants, or cancellation of disaster relief loans. However, if you receive money to help you recover from a disaster that is not specifically earmarked for repair or replacement of damaged property, it is not considered a reimbursement for tax loss purposes.

If your insurance company pays you for living expenses because you have to move out of your damaged home, these payments are not subtracted from your casualty loss. However, you may have to declare some of the payments as taxable income, if they exceed the actual amount of the extra expenses you had.

Example You had a fire in your apartment and had to move out for a month and stay in a hotel. Your rent is normally $500 per month, but the hotel cost $1,200. Your insurance company paid $1,000 for living expenses. You don't have to subtract any of the payment from your allowable casualty loss. The amount by which your hotel bill exceeds your rent ($1,200 - $500 = $700) is tax free. However the remaining $300 would have to be declared as extra income on Line 21 of Form 1040, unless you can show that your food, transportation, and other costs were $300 higher for the month because of the damage to your home.

If, at the time your tax return is due, you haven't yet received the final word from your insurance company on what your reimbursement will be, you must take a stab at an approximation, and subtract that amount. If it later turns out that you receive less than you expected, you can deduct the difference as a casualty loss on the tax return for the later year in which the insurance claim is finalized.

If it turns out that you receive more than you expected, you will have to include the excess amount in income in the year you receive it. However, if any part of your original deduction did not reduce your tax bill, you don't have to include that part of the reimbursement in your income.

Example In December of 2014, you suffered a personal loss of $5,000 and expected to receive $3,000 from your insurance company. However, due to the application of the $100-plus-10 percent rule (discussed in the next section), you were unable to deduct any of your loss in 2014. If, in 2014, you actually receive $5,000 from the insurance company, you don't have to declare any of it as income, because you declared no loss in 2014 and the payment does not exceed your actual loss.

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