@Opus 17 wrote:
the rule is similar if your house is damaged and you repair it, but the insurance payment to make the repair is more than the original price. The general rule is as above. For edge cases, please give specifics.
Yeah, sure, here's an example:
You bought your house 60 years ago for $100,000 and have been using it as your principal residence ever since. The house sustained severe damage from major hurricane force winds and, among other things, the roof needs to be replaced. The house is now worth $10 million and the insurance company issues a check to you, in the amount of 700,000, to replace the roof, install new windows and doors, et al. You pay a contractor $700,000 to effect all of the repairs. The gain ($700,000 - $100,000) is NOT taxable to you immediately but can be deferred per Section 1033.
I can tell you don't deal with these types of issues personally but just try to guess the correct answer or use logic to rationalize your answers and that doesn't work with the Code and Regs. You should be made aware that in the hypo I wrote above that it's possible for the homeowner to never even touch the money from the insurance company for the damage sustained. For example, if the house was refinanced and had an $8 million mortgage, the check from the insurance company would almost certainly be made payable to you AND the lender. In that case you can rest assured that the lender would not just hand the funds over to you on the chance that you would make the needed repairs. You're going to need a contract in place to make the repairs and the lender will release the funds to that contractor (most instances). Hence, the reason for the statute and regs; you never actually touch the insurance proceeds.
