If your property loss was covered by insurance, you must
submit a timely claim for reimbursement with the insurance
company in order to deduct any casualty losses for property
damage. The exception to this rule is that if your policy
requires you to pay a deductible amount, this amount counts as a
loss even if you don't file a claim.
Once you've determined the amount of your loss, you must
subtract the value of the insurance reimbursements you received,
to arrive at your deductible casualty loss. If the
reimbursements are greater than your losses as calculated under
IRS rules, you may actually have a gain as a result of the
If your home suffers a loss and you are
reimbursed on the basis of your home's
appreciated value, but for tax purposes you can
only claim the original cost of the home as a
loss, you may experience a gain upon receiving
the insurance money. You can generally avoid
paying tax on the gain if you purchase qualified
replacement property within two years
Insurance payments are the most common form of reimbursement
for casualty losses, but you will also have to count any
condemnation awards, disaster relief grants, or cancellation of
disaster relief loans. However, if you receive money to help you
recover from a disaster that is not specifically earmarked for
repair or replacement of damaged property, it is not considered
a reimbursement for tax loss purposes.
If your insurance company pays you for living expenses
because you have to move out of your damaged home, these
payments are not subtracted from your casualty loss. However,
you may have to declare some of the payments as taxable income,
if they exceed the actual amount of the extra expenses you had.
You had a fire in your apartment and had to
move out for a month and stay in a hotel. Your
rent is normally $500 per month, but the hotel
cost $1,200. Your insurance company paid $1,000
for living expenses.
You don't have to subtract any of the payment
from your allowable casualty loss. The amount by
which your hotel bill exceeds your rent ($1,200
- $500 = $700) is tax free. However the
remaining $300 would have to be declared as
extra income on Line 21 of Form 1040, unless you
can show that your food, transportation, and
other costs were $300 higher for the month
because of the damage to your home.
If, at the time your tax return is due, you haven't yet
received the final word from your insurance company on what your
reimbursement will be, you must take a stab at an approximation,
and subtract that amount. If it later turns out that you receive
less than you expected, you can deduct the difference as a
casualty loss on the tax return for the later year in which the
insurance claim is finalized.
If it turns out that you receive more than you expected, you
will have to include the excess amount in income in the year you
receive it. However, if any part of your original deduction did
not reduce your tax bill, you don't have to include that part of
the reimbursement in your income.
In December of 2001, you suffered a personal
loss of $5,000 and expected to receive $3,000
from your insurance company. However, due to the
application of the $100-plus-10 percent rule
(discussed below), you were unable to deduct any
of your loss in 2001. If, in 2002, you actually
receive $5,000 from the insurance company, you
don't have to declare any of it as income.