Casualty Gain

[Gretel]

I know we had several discussions on this topic and I read TTB and instructions but am still confused on a very simple question. Home has hail damage of $20,000 and insurance pays $20,000 in 2013. Repairs will be done in 2014 for $10,000. I believe the other $10,000 are income in 2013 but another preparer disagrees with me. Sticking point is if $10,000 not used to repair the house is considered to reduce the basis or if this is income.

[jimenright]

no gain

If the difference in property value before and after the caualty is $20,000 then owner had a $20,000 loss and there is no gain.

[Gretel]

If the difference in property value before and after the caualty is $20,000 then owner had a $20,000 loss and there is no gain.

This is exactly what makes this a huge grey area. How does one go about this? Nobody has an appraisal before and/or after the damage, especially not with smaller amounts. I doubt that a building looses any value if the damage was fixed. I know some argue the reimbursement from the insurance is the indicator for a decrease in the property value but in reality this is far from the truth. Does anyone have experience with how IRS handles this?

[Gary2]

This is exactly what makes this a huge grey area. How does one go about this? Nobody has an appraisal before and/or after the damage, especially not with smaller amounts. I doubt that a building looses any value if the damage was fixed. I know some argue the reimbursement from the insurance is the indicator for a decrease in the property value but in reality this is far from the truth. Does anyone have experience with how IRS handles this?

See Pub. 547, particularly the paragraph "Cost of cleaning up or making repairs" on page 5. This gives the criteria under which the IRS will let you use the cost of repairs as a proxy for the decrease in market value.

Unless the reimbursement is dramatically different from the actual cost, I wouldn't sweat the details.

[jimenright]

no gain

If you have a carwreck and are paid by insurance for your loss and then decide not to fix the car and pocket the insurance money; this does not mean you have a gain. How much is spent for repairs is irrelevent, you still had the loss. You could also have repairs that did not return the car to it's former value for less than the insurance award or have your grandson fix it for free.

[Roland Slugg]

The above two replies to your posts are correct. There is no taxable gain, and an appraisal is not necessary. The property's basis is reduced by the amount of insurance received for the loss, and it's increased by any sums spent to restore the property to its previous condition.

[Gretel]

Thanks everyone, now I am up to par and not that confused anymore.