If you've suffered a loss in a natural disaster, and your insurance payment is greater than your basis, then in the eyes of the IRS you've
enjoyed a (potentially) taxable gain. If your loss occurred in an area declared a federal disaster area, you
can delay reporting the taxable gain by reinvesting the claim money
in replacement property up to four years from the year you received the
insurance settlement; that period is extended to five years in certain
areas, such as those affected by Hurricane Katrina in 2005 and the
Kansas tornadoes of 2007. The IRS will not tax any insurance proceeds
received for damage or loss of "unscheduled" personal property such as
furniture, books, jewelry, clothing and the like.
