Proceeds from insurance policy payouts aren’t usually subject to income tax. The payout represents the replacement of lost property rather than additional income. The only way the payout would be taxable is if it totaled more than the property was worth, and even then you won’t pay taxes on any portion of the payout if you use it to buy a new property within the designated time frame.
Payout vs. Value
Taxes on home fire claims depend on how your payout compares to the property's fair market value. The IRS measures casualty losses using the property’s adjusted tax basis immediately before the loss, or the property’s decline in fair market value that resulted from the fire, whichever is lower. If your insurance payout is higher than either total, the extra funds are subject to taxation. However, if you use the extra money to purchase a new property within two years, you won’t have to pay taxes on it. You also won’t have to pay taxes if the amount doesn’t exceed the IRS maximum for capital gains on primary residences, as long as that’s been your main residence for at least two of the past five years.
- IRS.gov: Publication 547 (2014), Casualties, Disasters, and Thefts
- Fox Business: Do I Need to Pay Tax on This Insurance Money?
- Warner, Norcross & Judd: How to Minimize Taxable Income from Casualty Loss Insurance Recoveries
- Nolo: How Landlords Can Deduct Casualty and Theft Losses from Their Taxes
- IRS.gov: Form 4684 -- Casualties and Theft
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