Property damaged by fire, are unused insurance proceeds taxable? Tax implications for keeping vs. selling property?

4 Replies

I have a fourplex that was damaged by fire, thankfully no one was hurt.

For ease of the example, let's assume the following numbers:

Property was purchased for $150k. Insurance check I will get is $80k.

What are the tax implications of each of these scenarios?

1) I sell the property as-is to another investor for $100k, and pocket the $80k insurance check. Can I take a loss from the sale of the property ($150k basis - $100k sale price = $50k loss)? How would the $80k insurance check be taxed? Or would the basis of the property be offset by the insurance proceeds?

2) I do general fire remediation on the property (spend $30k), then sell to another investor for $120k. Same question as above.

3) I do a complete rehab for $60k, then pocket the remaining $20k left over from the insurance check.

Basically, I am trying to figure out the best exit strategy for tax purposes.

I have a call in to my CPA as well, but thought hopefully someone else who has experienced any of the above scenarios might offer some advice on how they handled it.



@William Petrisko

I am not a CPA but have been in a similar situation. It is my understanding that any insurance proceeds that are not used will be taxed as income. If you don't do any repairs then the full amount will be taxed. If the property is sold at a loss then you should be able to take the loss based on your current basis. If the insurance claim is 80k and you spend 60k restoring the property per the loss then you will be taxed on the 20k. If you spend 30k then you will be taxed on 50k. You can't lower the basis by the insurance claim amount. This is my understanding....

No tax or legal advice

@William Petrisko you might want to have a closer read of your insurance policy and speak with your agent. Most policies are worded with "repair or replacement" valuation meaning that the $80K they give you is based on you actually making the repairs. Most policies also include a provision that if you choose to not "repair or replace with like kind and quality" the valuation method used to adjust the claim is "Actual Cash Value". The ACV valuation is always less than the Repair or Replace as it is a depreciated value of the asset.

Keep in mind the intent of an insurance policy is that of a contract of indemnity, meaning it is meant to get you back to where you were before the loss - not better or worse off.

I would be particularly careful with this as the insurance company could take action against you or readjust the claim on an ACV basis if you proceed with any of these options.

Maybe you've already gone down this path and the $80K is based on ACV which case ignore all of my advice :).

@Matt Rodak

It is my experience that the insurer won't pay out for replacement cost until after the repairs are complete with invoices and/or paid receipts.

insurance proceeds reduce the basis;

Fix up-repair expenses increase the basis.

So it does not really matter what you do,you always pay taxes on the excess proceeds

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