Insurance settlement

[TimNorthport]

Received $75k from an insurance settlement (lawsuit started) for roof damage based on engineer report estimates.  I figure I can get it done for $50k.  Do I need to report the$25k as income?

[AbrahamT]

According to Publication 4345 see HERE under subsection "Loss in Value of Property" the rules relating to income received from a settlement in reporting it as income bear no effect on reporting income on the money you saved from getting it done at a lower cost. Rather, it all depends on whether the property settlement is more or less than the adjusted basis of the property. In your case, only if the total amount of $75k is "more" than the adjusted basis of the roof damage you suffered ,would you have to report it that excess as Misc. Other  Income on your Form 1040 Line 21.

[Opus 17]

No, but you reduce your basis in the property.

(This applies to personal property.  If this is a rental or commercial property, we will have to re-think the answers.)

Suppose you bought the property for $200,000.  If you have a loss of value of $75,000 that you are compensated for, the $75,000 is not taxable income, but it reduces your basis in the property, which will affect your capital gains when you sell.

Then, you renovate the roof for $50,000.  That's a property improvement that increases the cost basis.

So at the end of it all, your new basis is $175,000, which will result in a larger capital gain, and possibly higher capital gains taxes, when you sell.

The only time the $75,000 would be taxable is if the original basis in the property was less than $75,000.  If the basis was $60,000, then the payment reduces your basis to zero and you pay tax on $15,000.  Then you invest $50,000 in the repair, so your new basis is $50,000.