insurance reimbursement deductions

[bobp1426]

We were impacted by Hurricane Sandy at our vacation home.  The insurance company paid us the depreciated value of the damaged items.  We sold our home last year and on the "Adjusted Basis of Home Sold Worksheet", section 3, it asks about the difference between repairs and insurance reimbursement.  I assume we use the difference in actual cost to replace an item (e.g. A/C and heater units) versus what the insurance company paid us.  Is there a place to include the policy deductible of $2000 or don't we include it as we are using the actual cost difference? 

[Opus 17]

So for sale of your home, you only care about "real property" or real estate -- that means land, and anything permanently attached to the land.  You don't include or make adjustments for the value of personal property or other items that were damaged in the storm.

Let's start with the cost basis of your home, which is what you originally paid for it.  You decrease the cost basis by any non-taxed insurance payments you received for damages to the home (the real property).  You increase the cost basis by the value of any improvements to the real property. 

An improvement is a betterment -- it must add value or extend the useful life of the home or one of it's systems. This is different than a repair, which restore the property to as-was condition.

You don't worry about the deductible, you only look at what you were paid for damage to the real property.

So let's suppose your original basis was $100,000.  You allocate $4,000 of the insurance payment to damaged windows, and $5,000 of the payment to damaged furnace and A/C.  You start by dropping your cost basis by $9,000 to $91,000.

The consider the character of the repairs.  For the furnace and A/C, you installed new equipment with a 30 year life, this is a betterment, since it extends the useful life of the home or one of it's subsystems.  The cost was $6,000, so you add that to your basis.  However, for the windows, you replaced broken panes of glass with new glass, but did not modify the window hardware, frames or structure.  That's a repair, and does not increase your cost basis.  (On the other hand, if you replaced the broken single pane windows with double or triple pane insulated windows, that is an improvement or betterment, since it adds value or extends the life.)

[Opus 17]

Also, if you took a tax deduction for a casualty loss on your 2012 tax return, that also reduces your cost basis. 

[JulieS]

In filling out the form, you just need to answer the question that is being asked on that line:

• Line 3a - the amount paid for repairs to damaged property.
• Line 3b - the amount of insurance reimbursement you received.
• Line 3c - the amount of loss, not covered by insurance, that you were able to deduct.
• Line 3d calculates based on your entries. 

[bobp1426]

When looking at the form again, it subtracts 3b and 3c from 3a.  Since 3c is entered as a positive number, it reduces the deduction.  Looking further, if you only use net received and net cost, then probably 3c doesn't need to be entered.  Thanks, 

[bobp1426]

Thanks for the info.  We didn't take a previous tax deduction for any casualty loss.  For example, we had roof damage of $20 K and the insurance company paid us $15 K (after the deductible).  Using this scenario, I would enter $20 K on line 3a, $ 15 K on 3b and "0" on 3c since the values are net and we didn't take a deduction previously on any tax return.  Thus we have a $5 K increase in basis.  Thanks