Insurance Proceeds from Storm Damage

[WhiteOleander]

This spring in our area we had three very intense storms with hail and high winds. A significant portion of the population has filed claims for damages with their insurance companies. Some of them are employees in this office. So, we expect quite a few clients calling and coming in to determine if the proceeds are taxable or not.

Most of the people are claiming damage for their roof. It is by no means a total loss on the property. Some are not planning to replace the roof. Just keep the insurance proceeds.

It is my understanding after reading some things that these proceeds are not taxable to them unless they exceed the basis in the property. They would however have to adjust the basis of the property going forward.

Any input will be appreciated. Please tell me if I am off base by my understanding of the taxability of the insurance proceeds.

[Snaggletooth]

Unlikely

I believe your understanding is correct. However, the economic possibility of recovering that kind of excess from an insurance company is remote, and can most likely occur only in circumstances where there is substantially appreciated property. Even then, the taxpayer may be rescued from taxation under involuntary conversion rules if property is replaced, which would occur at today's values.

Where this might cause an impasse, would be a situation where the client intends to replace the property, but hasn't done so by the time a tax return is due.