back to taxes/casualty loss income

[Unregistered]

client's house burns down, still paying 1300 mortgage.
insurance pays 3600 a month for one year to rent new house while
other is being rebuilt....any "income" issues here??...i think not, as rental
money does not exceed "additional" living expenses. rental house is 3600/month.
as usual, thanks for responses.

[Bees Knees]

TTB, page 4-21, "If insurance or other reimbursement is more than the basis in the property damaged or destroyed, the reimbursement is a gain. The gain is taxable if the taxpayer does not use the proceeds to purchase replacement property that is similar or related in service and use."

What does that mean?

1. Any insurance proceeds received are going to be tax-free up to the basis in the property destroyed. So regardless of what you use the insurance for, whether fixing up your damaged house, or using it to buy groceries, or pay rent in an apartment, or take your cat to the vet, the insurance proceeds are going to be tax free until it exceeds the basis of your damaged house.

2. If and when those insurance proceeds exceed the basis in your damaged house, they will then continue to be tax free, as long as you use the proceeds to purchase replacement property. It does not matter how much money you receive, it is all tax free as long as it is used for replacement property.

Well, what is it when you are paying rent? Aren't you in essence purchasing replacement property? You can't live in your home because it is damaged. So you live in rental property, paid for by insurance. It don't matter how long or how much money insurance kicks in for your rent, it is tax free as long as it is considered to be for the cost of replacing your damaged property. I suppose that could be forever, if you happen to have an insurance policy that would cover such a thing.

[jainen]

That argument is a stretch

>>considered to be for the cost of replacing your damaged property<<

That argument is a stretch, in my opinion. Suppose you didn't have insurance. Would the cost of temporarily renting while you rebuilt the house be included in the new basis?

[Unregistered]

casualty loss income

a google response from CCH said "living expense reimbursement" may result in
"income"....for example....renter has to move out of apt while being repared...previous
rent was 500...new rent...1200...insurance pays 1000...income would be 300(1200 minus
500 equals 700 increase in living exps...resulting in 300 excess reimbursement.)
could not find "mortgage" type example....so i still believe no income for my client. any thoughts??

[jainen]

Good example

Good example. In a sense, your client has property insurance plus living expense insurance. When the insurance reimburses him for $3600 additional living expense, that doesn't count as income. (His full payment is additional expense because he is still maintaining his other housing costs of mortgage and taxes.)

[Bees Knees]

Its the same principal as the "stretch" of an example I gave. Basically the same thing...insurance that pays for renting a temporary apartment is "replacing" the old property and is not taxable. Unless in the case cited by CCH, the replacement is for something more than that which was lost.

[Snaggletooth]

Proximity of Damage

This is a good one.

I'm in Jainen's corner, sorta. Bees' cited message seemed to have a "proximate damage" ring to it, as opposed to "collateral damage." The much bally-hooed "stretch" could be extended to include car damage because while in the temporary abode, ol' Pete was having to drive 8 miles to work instead of 5, and the wreck occured on mile-marker 7. The argument here would be the wreck would have never occurred had Pete been living in his normal dwelling.

Having expressed my preference for "proximate damage" in Bees' text, I'll go a step further and state I would NEVER claim income on rent paid by an insurance company for temporary quarters.

[Bees Knees]

The CCH example is one where someone already renting gets to move up in the world to a better place while the old dump is being renovated.

I don't even think it is realistic because what renters insurance policy is going to pay more than your current expense. I think the point of that illustration is that you had a "gain" because the policy paid more than the replacement cost of that which was insured.

This example is where a homeowner must move into rental property while the place is being repaired. There is no way that could be considered "income" due to any gain. It is tax free. No different than getting a loaner car while your car is being repaired in the shop after an accident.