Insurance Reimbursement

[NotEasy]

Taxpayer's rental property was partially damaged by hail in 2014. The cost of the repair works estimated by the insurance company is $10,000. He received an insurance reimbursement of $7,000 in 2014 after the deductible. Before the end of 2014, he has spent $2,000 on repairing part of the damage. He expects to spend the other $5,000 to repair the other damages in 2015.

Is the $5,000 insurance reimbursement that he has not spent before the end of 2014 considered his 2014 income?

[ATSMAN]

Taxpayer's rental property was partially damaged by hail in 2014. The cost of the repair works estimated by the insurance company is $10,000. He received an insurance reimbursement of $7,000 in 2014 after the deductible. Before the end of 2014, he has spent $2,000 on repairing part of the damage. He expects to spend the other $5,000 to repair the other damages in 2015.

Is the $5,000 insurance reimbursement that he has not spent before the end of 2014 considered his 2014 income?

His repair cost will exceed the reimbursement so no taxable income.

[NotEasy]

His repair cost will exceed the reimbursement so no taxable income.

So he can exclude the income in 2014 based on the expectation that the reimbursement will be used for repair work in the future. Thank you.

And I am just curious. What will happen if he changes his mind later, decides not to do the repair work and just keeps the reimbursement? Is he supposed to amend his 2014 tax return if it comes to that situation?

I have actually heard of a 2 years time period that the repair works have to be done. Any truth in it?

[Roland Slugg]

The taxpayer has a taxable gain of $5,000, and unless he makes the election to postpone that gain, it should be reported on his 2014 return. He may, however, elect to postpone reporting that gain if he believes he will spent $5,000 or more replacing the damaged property NLT December 31, 2016 ... i.e. by the end of the second year after the year in which the gain was realized. If he does this, he must attach a statement to his return for the "gain year," 2014, and another statement to his return for the "replacement year," presumably 2015 (but it could be as late as 2016).

I suggest that you read the relevant portions of IRS Pub 547, in particular the sections titled "Replacement Period" and "How To Postpone a Gain" which are both on page 12 of that Pub. There you will find helpful information, including the content of the required statements if the taxpayer elects to postpone the gain.

[NotEasy]

The taxpayer has a taxable gain of $5,000, and unless he makes the election to postpone that gain, it should be reported on his 2014 return. He may, however, elect to postpone reporting that gain if he believes he will spent $5,000 or more replacing the damaged property NLT December 31, 2016 ... i.e. by the end of the second year after the year in which the gain was realized. If he does this, he must attach a statement to his return for the "gain year," 2014, and another statement to his return for the "replacement year," presumably 2015 (but it could be as late as 2016).

I suggest that you read the relevant portions of IRS Pub 547, in particular the sections titled "Replacement Period" and "How To Postpone a Gain" which are both on page 12 of that Pub. There you will find helpful information, including the content of the required statements if the taxpayer elects to postpone the gain.

Thank you.

Does the taxpayer also report the incident on Form 4864 Part II? Based on the calculations there, the taxpayer will have a casualty loss since the amount of damage is greater than the amount of insurance reimbursement. And if that's the case, he will have both casualty loss and taxable gain because of the same incident. Am I understanding everything correctly?