Excess insurance payout?

[Jerry1142]

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?

[Opus 17 · Accepted solution]

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.