In general income from a property damage claim is not taxable.
According to IRS Pub. 525
- Taxable and Nontaxable Income:
Property damage. Payments you received
for property damage aren't taxable if the payments
aren't more than your adjusted basis in
the property. If the payments are more than
your adjusted basis, you will realize a gain. If
the damage was due to an involuntary conversion,
you may defer the tax on the gain if you
purchase qualified replacement property. See
Pub. 544.
If the payments (including insurance proceeds)
you received, or expect to receive, are
less than your adjusted basis, you may be able
to claim a casualty deduction. See Pub. 547
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