Home damage from pipe leak covered by insurance.

[BTinSF]

A pipe in my kitchen leaked resulting in damage for which my insurance company paid $31,000 based on a repair estimate submitted by a "restoration" company they selected (I have "replacement cost" coverage and the insurance company says they are paying to restore the house to its condition 1 second before the leak).   Moldy, asbestos-laden drywall has been ripped out but repairs haven't started.  I will likely select a higher grade of cabinets and counter tops than previously existed which will increase the home's value but the repair to damaged floors may be imperfect reducing its value.  The estimate/insurance claim included replacing flooring throughout the house but I may just have the damaged area repaired (refinished) and hold back the rest of the settlement for that until I sell the home at which point I can either redo the floors or give a buyer a credit or just reduce the price.  So in effect, some aspects of the repair will increase the house's value, others may reduce it and not all of the insurance money may get spent right now.  Also, I don't know to accurately assess the affect of any of these things separately on the house's value.  How do I account for all this in my current year's taxes?  Do I just accept the insurer's assertion that the money they are paying restores the value of the home with neither a loss nor gain and not report any of this?

[xmasbaby0]

There is no place on your tax return to enter anything about the damage or repairs to your personal residence.  Casualty losses are not deductible on a federal return unless you were in a federal disaster area---and your damage resulted from a leaky pipe.   There is nothing to enter for 2022 about the possible increased value of the house, etc. that you are referring to.  Those concerns will come into play some day when you sell the house, so save all of the records of what you do to the house.

[Mike9241]

taxpayer may have a casualty gain which would be taxable.

from instructions 4684

Gain on Reimbursement
If the amount you receive in insurance or other
reimbursement is more than the cost or other
basis of the property, you have a gain. If you
have a gain, you may have to pay tax on it, or
you may be able to postpone the gain.
Don't report the gain on damaged,
destroyed, or stolen property if you receive
property that is similar or related to it in service
or use. Your basis in the new property is the
same as your basis in the old property.
To postpone all of the gain, the cost of the
replacement property must be equal to or more
than the reimbursement you received for your
property. If the cost of the replacement property
is less than the reimbursement received, you
must recognize the gain to the extent the
reimbursement exceeds the cost of the
replacement property.

[BTinSF]

I'm not sure whether I will have a loss or a gain.  I may not spend all the insurance money now and hold back the cost of completely redoing the floor but I expect that will be reflected either in a lower selling price of the home (reduced taxable gain) or in the cost of redoing the floors at that time.  Setting aside the floors, the cost of the replacement property and the service cost to do the work I do will probably exceed the insurance reimbursement for that portion of the repair because of higher quality materials used and, again, that I expect to be reflected as a positive factor when the home is sold (increased taxable gain on the sale).  But a lot of this is speculation right now.  

My inclination is to accept the conclusion of the restoration company and the insurance company that the insurance payment is cash that is equivalent in value to "property that is similar or related to it in service or use", regardless of whether I spend all the money now or at the time of sale in a few years (if I don't spend it to do all the repairs now and sell the house "as is", I would expect to get a lower selling price approximately equivalent to the insurance money not spent so it would only be a temporary gain).

Right?