Amount of Taxable Insurance Proceeds?


I

Inka Dinka

While I was in the process of selling my house, I suffered
water damage that was covered by my homeowners insurance.
The total amount of damage was $12K, and after my deductable
of $1K I received $11K from the insurance company. I paid
$5K to have some repairs done, and negotiated with the buyer
to lower the purchase price by $4K to offset the remaining
repairs that they felt needed to be done. In the end I
netted a $2K profit.

I understand that the $2K would be taxable as income. But
would the $4K offset I gave the buyer also be taxable?

Thanks.
 
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M

MTW

Inka Dinka said:
I understand that the $2K would be taxable as income. But
would the $4K offset I gave the buyer also be taxable?
On first impression, I'm not sure that any of the insurance
proceeds are taxable assuming that $12,000 is an appropriate
measure of the decline in FMV caused by the water damage.
However, the basis of your property must be adjusted by the
fact that you didn't spend all of the money on repairs.
Whether THAT will eventually create a tax liability when the
property is sold remains to be seen (likely not if this is
your personal residence and the sale qualifies for the
Section 121 exclusion).

MTW
 
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I

Inka Dinka

On first impression, I'm not sure that any of the insurance
proceeds are taxable assuming that $12,000 is an appropriate
measure of the decline in FMV caused by the water damage.
However, the basis of your property must be adjusted by the
fact that you didn't spend all of the money on repairs.
Whether THAT will eventually create a tax liability when the
property is sold remains to be seen (likely not if this is
your personal residence and the sale qualifies for the
Section 121 exclusion).
The house was my personal residence and will qualify for the
$500K exclusion that my wife and I are allowed. The total
value of the damage was actually $15K (based on my written
contractor estimates), but given the complexity of the
situation I did not argue with my insurance company for the
full amount. With that being the case, how would I deal with
this on my taxes next year?

Thanks!
 

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