Casualty Insurance Memphis TN

If you receive insurance reimbursement that is more than your adjusted basis in the destroyed or damaged property, you may actually have a gain as a result of the casualty or theft. However, the fact that a gain exists does not necessarily mean that it will be taxable right away. You will probably be able to defer the gain to a later year (or perhaps indefinitely) if you purchase qualified replacement property.

First, in calculating your gain, remember that you can subtract from your reimbursement any expenses you incurred in obtaining the reimbursement, such as the expenses of hiring an independent insurance adjuster.

Then, if you spend the same amount as the remainder of the insurance money you received, either repairing or restoring the property, or in purchasing replacement property, you can postpone tax on the gain. However, you must make the replacement within two years of the end of the tax year in which you have the gain. If the loss was to your main home, and the area was declared a federal disaster area, you have more time: up to four years after the end of your tax year in which you have the gain.

The replacement property must be similar or related in use to the property that was destroyed. For instance, if your car was destroyed, you can replace it with another car, but not with a piano. If your home was destroyed, you can replace it with another main residence such as a home or a condo, but not with a store building. If the property was investment real estate, then other investment real estate will qualify as a replacement, but not a second home. However, if the property was business or income-producing property located in a federally-declared disaster area, any business-use property will qualify.

You cannot postpone a casualty gain of more than $100,000 by purchasing replacement property from a related party, such as a corporation you control.

However, you can replace property and defer gain by purchasing a controlling interest in a corporation that owns similar property, as long as you own at least 80 percent of the stock.

If you purchase replacement property, you will have to reduce the tax basis of the new property to reflect the casualty gain you postponed.

Daisy Tandy, an avid car collector, purchased a 1948 Packard convertible in poor condition at a garage sale for $1,000. After months of hard work and an additional $5,000 in car parts, she managed to restore most of the car's majesty, not to mention its chrome. To protect her labor of love and her investment, she insured the car for $25,000, with a $500 deductible. After a freak auto accident involving her neighbor's fence, Miss Daisy's car was totaled. Her insurance company reimbursed her in the amount of $24,500 ($25,000 less the $500 deductible). So, Miss Daisy had $18,500 ($24,500 minus the $1,000 purchase price and $5,000 in upgrades) of realized gain on the involuntary conversion of the property. Miss Daisy spent the entire $24,...

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 casualty.

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 deduct...

A casualty, for federal income tax purposes, is a sudden, unexpected, or unusual loss or damage to some property you own.

Examples of events that typically cause casualty losses are earthquakes, hurricanes, tornadoes, floods, storms, volcanic eruptions, shipwrecks, cave-ins, sonic booms, fires, car accidents, airplane crashes, riots, vandalism, or burglaries, larcenies, or embezzlement.

Examples of events that are not considered deductible casualties are progressive deterioration caused by age, wind and weather, wood rot, termites or other insect infestation, or drought.

Work Smart There are situations where insect infestation can be considered a casualty for tax purposes, if the destruction was very sudden and severe. Also, drought can be considered a casualty if the property was used for a trade or business or in some other transaction entered into for profit, such as an investment in farmland.

Simply misplacing or losing property does not qualify as a tax-deductible casualty, even though your insurance company may consider it a reimbursable loss. However, if you lose property in conjunction with another accident, it may qualify.

For instance, if you were involved in a car accident that scattered your property into the surrounding area and some of your jewelry was never found, you can deduct the loss of the jewelry.

Work Smart Losses of business inventory can be treated as either a casualty lo...