Can I increase the cost basis of the house by $100,000 for a new kitchen or is this not allowed because the insurance company paid for it?

[conradgoldberg]

Also, should I pay contractors directly or have insurance company write the checks to pay for replacing the kitchen. The main issue is still whether or not I can increase the cost basis of the kitchen (which should offset some profit on eventual sale of house) even though the funds came in the form of reimbursement from my insurance company. Thanks!

[AmandaR1 · Accepted solution]

You should increase the cost basis of your house by the costs of improvements, but also reduce the cost basis by all insurance reimbursements. 

If you have the insurance company pay costs directly, then those amounts are simply excluded from your cost basis calculation.  While the improvement increases your value, the reimbursement decreases it. 

For this info at the IRS, check out the last paragraph at the IRS tax topic resource here.