Insurance Reimbursement

[Jesse]

Primary residence has damage to a portion of their roof, rain gutter system, and siding. Insurance issues a check for $20,000 to homeowner and contractor. Contractor endorses check and gives to homeowner to deposit and homeowner actually pays contractor only $14,000.

Is the other $6,000 taxable to the homeowner or would it be a reduction of basis in the home?

Would it make a difference if the homeowner took the excess money and actually reinvested it into their home for other improvements such as new doors and windows?

[Jesse]

Talking to myself .....

Figuring a Gain
If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Your gain is figured as follows.
•The amount you receive minus your adjusted basis in the property at the time of the casualty or theft.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~
So if my adjusted basis in the home is $100,000 and the insurance reimburses me $20,000 I have no gain, but my adjusted basis in the home would now be $80,000.

If I am reimbursed $20,000 but only spend $14,000, my adjusted basis is now $94,000 and the $6,000 is not taxable income, but a reduction in by basis. If I use the $6,000 for other improvements in the home it will increase the basis back up to the $100,000.

So unless the adjusted basis in the home is $20,000 or less there will be no gain from the insurance reimbursement.

Agree/Disagree? Any thoughts?

[Jesse]

Bump

Let me apologize in advance if this is a stupid question, I'm just not sure that in talking to myself I have come to the correct conclusion and my dog just gives me a weird look.

I did talk to the insurance agent and it is a legit payment, no insurance fraud, the insurance company gave the estimate for damages and told the insured if the contractor wanted to refund part of the funds that is totally up to them. I thought it odd the contractor would be willing to do this but that's not my concern.

Has anyone else encountered a similar situation? If it were your client what would you advise?

[Kram BergGold]

$94k

Jesse,
I think you have it correctly. No taxable gain and basis $94k.

[Jesse]

Thanks Kram