Before you cash your insurance check make sure you figure out how much of it goes to Dear Leader.
When you have insurance coverage for disaster-related property damage — under a homeowners, renters, or business policy — you might actually have a taxable gain instead of a deductible casualty loss. Why? Because if the insurance proceeds exceed the tax basis of the damaged or destroyed property (normally equal to its cost), you have a taxable profit as far as the IRS is concerned. This is the case even if the insurance company doesn’t fully compensate you for the pre-casualty value of the property. These gains are called involuntary conversion gains — because the casualty event causes your property to suddenly be converted into cash from the insurance proceeds.
For example, you could have a big involuntary conversion gain if your valuable vacation home is heavily damaged or destroyed and your insurance coverage greatly exceeds what you paid for the property when you bought it years ago.
If you have an involuntary conversion gain, it generally must be reported as income on your Form 1040 unless you (1) make sufficient expenditures to repair or replace the property and (2) make a special tax election to defer the gain. If you make the election (you generally should), you have a taxable gain only to the extent the insurance proceeds exceed what you spend to repair or replace the property. The expenditures for repairs or replacement generally must occur within the period beginning on the date the property was damaged or destroyed and ending two years after the close of the tax year in which you have the involuntary conversion gain.
Because, you know, you haven’t suffered enough. And those Obamaphones don’t pay for themselves.