Client Question: Are insurance proceeds I receive from a fire loss taxable?

As almost always, the answer is “it depends”.  In general, there is taxable income if the amount received from the insurance policy is more than the cost of what was lost.  However, there are also exceptions to this rule.  For instance, the gain is not taxable to the extent the insurance proceeds are used to replace the property with similar property within two years.  So, for example, if a fire destroyed a place of business whose cost (excluding contents) with improvements was $400,000 20 years ago, and the insurance proceeds were $600,000, then there is a gain of $200,000.  However, if all of the proceeds are used to buy or build another house within 2 years, then none of the $600,000 is taxable. 

There is also a provision for a deduction for a loss (with limitations) where the insurance proceeds are less than your cost.

The taxpayer uses Form 4684 to report all of the information and determine if there’s a gain or loss, and whether or not it’s a taxable event. 

Check out the IRS’s form and related instructions for more information: 

http://www.irs.gov/pub/irs-pdf/f4684.pdf

http://www.irs.gov/pub/irs-pdf/i4684.pdf

And, as usual, if you have any questions, please contact us.

2 thoughts on “Client Question: Are insurance proceeds I receive from a fire loss taxable?”

  1. Harry Richardson says:

    what if the insurance proceeds are more than your cost but lower then the value of the building at the time of the fire?

    1. Steve Wisinski CPA CFE MAFF says:

      Thanks for the question. Even though the fair market value of the building is higher you have to compare proceeds to cost to determine your gain. This certainly can feel like adding insult to injury. Unfortunately the proceeds are treated as a de facto sale (since you still have the real estate), but a measure to get you back to where you started.

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