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Jerry1142
New Member

Excess insurance payout?

I received a homeowners insurance check for water damage from a burst pipe in my residence. The cost of repairs was less than the insurance check. Should the excess amount be reported as income on my return?

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Opus 17
Level 15

Excess insurance payout?

Tricky.  When you have a loss, the amount of the loss is the decrease in fair market value of the house caused by the loss.  The insurance payment is only a taxable gain if the payment is more than the amount of the loss.

The problem is that it is almost impossible to document the loss of "fair market value" in a home that is, for example, flooded.  So the IRS says that in most cases, the repair cost can be used as an estimate of the loss of value.  Your insurance company made a good faith estimate of the cost of restoration, but you managed to do it for less.  So I would say that you can rely on the insurance company's estimate as being the amount of loss, therefore the difference in repair cost would not be considered taxable income.   Plus, the IRS generally does not consider insurance payments to be taxable so they won't be looking for it.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

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1 Reply
Opus 17
Level 15

Excess insurance payout?

Tricky.  When you have a loss, the amount of the loss is the decrease in fair market value of the house caused by the loss.  The insurance payment is only a taxable gain if the payment is more than the amount of the loss.

The problem is that it is almost impossible to document the loss of "fair market value" in a home that is, for example, flooded.  So the IRS says that in most cases, the repair cost can be used as an estimate of the loss of value.  Your insurance company made a good faith estimate of the cost of restoration, but you managed to do it for less.  So I would say that you can rely on the insurance company's estimate as being the amount of loss, therefore the difference in repair cost would not be considered taxable income.   Plus, the IRS generally does not consider insurance payments to be taxable so they won't be looking for it.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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