Burned house, and an insurance payout - a tax problem?

One of my investment properties (a SFH) had some severe fire damage recently. Luckily, my contractor WILL be done rebuiding it before the end of the year.

In the end, I will have a surplus of money left over from the amount the insurance company gave me. It won’t be all that much…just several thousand dollars.

Is this taxable income? I’ve heard some insurance payouts are not.

If YES, is it declared passive income (e.g. it’d be categorized like rental house income, and therefore not be subject to fica/medicare)?


As a general rule, the portion of an insurance reimbursement that exceeds your cost to repair or replace your property is taxable income in the year received.

Taxed as ordinary income, but not self-employment income.

Wow. Thank goodness he’ll be completely done in a few days — in 2008!

So – to confirm – what if this was the case? Say the fire happened in Nov 2008, and I got $75,000 in insurance money in Dec 2008. I have a single-member LLC that owns the property; obviously my year end is Dec 31st 2008. In the event he didn’t even start on the property until Jan 2009, and did not take any draws or down payments to start the work, I would owe taxes on that additional $75,000? And be forced to deduct the repairs from my following year’s tax return (2009 tax return in early 2010)?

I would not recognize the insurance payment as income until all the bills are paid, and then excess insurance proceeds become income. I would not address the tax treatment until all the repairs are completed and you close the books on the project.

Your accountant will help you figure out the accounting entries on this one.

Gain/loss from the insurance proceeds is calculated on the adjusted basis of the property lost. It can be postponed until the property is replaced.

Then the replacement property is capitalized at cost and depreciated.

Partial losses can get a little messy.

Cash leftover after bills are paid is irrelevant.

got your message. to clarify for others reading:

you’re confusing “repair costs” with “loss.” let’s look at a hypothetical example.

the property was worth 70k when you bought it. fire. now worth 40k. your loss is 30k. you received 30k from the insurance co. no gain. no loss.

(I would argue that if the insurance co paid you 30k, your loss was at least 30k. )

you record the 30k loss and continue to depreciate the remaining 40k as usual.

you incur 24k of construction costs. you begin depreciation of 24k as if it was another asset.

the 24 has nothing to do with the gain/loss calculation.

Now, if your loss was <> 30k then you may have a gain/loss. ie: after the fire the property was worth 50k. now you have a 10k gain (70-50=20 loss. 30 ins - 20 loss = 10 gain).

IMO this is unlikely since the ins co paid you 30k. your loss of value is at least 30k. insurance cos don’t make a habit of paying more than actual losses. After deductibles etc, it’s more likely that you have a deductible net loss.

Informative as always, Mark.