Hail Damage - Gain postponed

[Gretel]

Need some help with clarification.

Client incurred hail damage in 2007 with insurance reimbursement in 2007 and 2008, let's say $10,000 in 2007 and $20,000 in 2008. Client did repairs worth $5,000 in 2007. I postponed all gain for a total of $25,000.

Now in 2009 no more repairs were done. I must include in income the gain from 2007 and I believe also from 2008 since this is one damage. Language used in TTB:.....use within two years of the end of the first tax year in which any part of the gain is realized.

Since first part is realized in 2007, gain from 2008 must also be reported as gain now, correct?

[Gretel]

I wanna be on top again. Still hoping.

[Earl]

Casualty

1. Why would insurance reimbursement be so large when damage appears to be so small that it only requires $5,000 to repair.

2. If property is not completely damaged (able to be repaired) the gain if any cannot be postponed and must be reported in year the reimbursement is received. Property purchased must be a replacement for the property destroyed in the casualty. Example: If property is a roof that was damaged and a new roof is purchased the gain from insurance would not be eligible for deferral. The new roof is a repair not a replacement.

Just my interpretation and could very well be incorrect.

[Gretel]

1. Why would insurance reimbursement be so large when damage appears to be so small that it only requires $5,000 to repair.

2. If property is not completely damaged (able to be repaired) the gain if any cannot be postponed and must be reported in year the reimbursement is received. Property purchased must be a replacement for the property destroyed in the casualty. Example: If property is a roof that was damaged and a new roof is purchased the gain from insurance would not be eligible for deferral. The new roof is a repair not a replacement.

Just my interpretation and could very well be incorrect.

Thanks, Earl. To answer your question: Several buildings were damaged, roofs and siding, and all repairs will be done eventually.

TTB 4-22 says: .....basis in the property damaged or destroyed, the reimbursement is a gain. It never occurred to me that replacement property could mean literally completely new property. I do some more digging.

[Earl]

Casualty

The amount of casualty loss is determined by the difference in FMV before and after the loss and repairs would normally not enter into the equation.

Any insurance reimbursement would reduce the casualty loss. Since it is doubtful that an insurance company would reimburse more that the damage to the property it is highly doubtful you would be reimbursed for more than the casualty loss.

If the insurance reimbursement is greater than the adjusted basis of the property that sustained the damage then there would be capital gain. This gain can be deferred according to IRC 1033. However, to qualify for Section 1033 the property must be damaged so that it cannot be repaired. Court Case: C.G. Willis, Inc., 15 AFTR 2d 686 (3rd Cir. 1965)

[Gretel]

Thanks again. With reading quite a bit more on the subject I came to the same conclusion. I am only glad that the inclusion amount for 2007 in minor since most of the insurance money was actually spend that year and in 2008 income tax liability will not increase because of 0% Cap.Gains.