Insurance Claim Proceeds

[mf44444]

I had a fancy roofing material on my house. This past year we got hail damage and the insurance adjuster gave me this:

Replacement Cost Value: $49,503.67

Less Depreciation: 3,452.38

Net Claim: $44,949.84

Net Claim if Depreciation is Recovered: $48,402.22

I confirmed that if I chose to replace the roof with standard shingles that I could keep the Net Claim difference. I ended up getting about 20,000 after replacing my roof. 

Is that 20,000 taxable? My hope is it's not considered income as I was compensated for my loss of the fancy material/roof value. In theory my house is worth less now then it was with the fancy roofing material.

[TomD8 · Accepted solution]

As a general rule the $20,000 isn't considered taxable, because the insurance settlement only brought you back to where you were before the damage occurred.  It did not result in a capital gain for you.  You're not required to spend the settlement money on an exact replacement for the damaged property.  

[Carl]

Basically, if what the insurance paid out was more than the cost of repair/replacement, then the difference is taxable income to you.

[mf44444]

An answer I got from a CPA that seems to align more with the other answer on this thread is this:

As long as insurance didn't pay more than the ORIGINAL roofs value, then there is no taxable event. 

[tagteam]

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@mf44444 wrote:

As long as insurance didn't pay more than the ORIGINAL roofs value, then there is no taxable event. 

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If the insurance payout exceeded the replacement cost, the basis of the property is reduced accordingly. Otherwise, the insurance proceeds are not taxable.

Note that insurance payouts for loss of income (rental income) are taxable.

[TomD8]

There is no legal requirement for you to use an insurance settlement to exactly replace the lost or damaged property.  For example, if you get an insurance settlement for a stolen high-end expensive TV, you’re not required to use it to buy another high-end expensive TV.  And as your CPA said, there is no taxable event unless the settlement amount exceeds your original cost.  Otherwise, the settlement is just making you whole, which is not a taxable event.