Insurance payout treatment

[doninfosys]

My insurance payout was $8000 for hail damage to gutters, siding and roof. I only replaced the roof for $4500.  Can I apply the differential of $3500 as a decrement to my cost basis instead of paying tax on the gain this year and take the hit when I sell a few years from now?

[MinhT1]

Please see this TurboTax answer from Champion Opus 17 which addresses your question.

[doninfosys]

That opinion appears to answer part of my query.   Is it implied that if the unrepaired items will case me to sell the house for a commensurately less amount, then I need not decrement the basis to offset the excess payout?

[NCperson · Accepted solution]

correct - and the money is not taxable at all 

keep it simple, the claim paid to you is not a taxable event and has no bearing on your cost basis, whether or not you decide to fix up the house with the proceeds. 

in the perfect world, if you do not fix the damage, your house is now worth that much less.