Our old garage suffered some storm damage in 2003. The insurance company
totalled it and paid us the amount it was insured for. We patched the
roof and the garage was perfectly usable. We haven't yet gotten around
to rebuilding the garage, and now it looks like there is a divorce on
the horizon. Neither one of us wants to keep the house so we will sell
it. I can't image trying to rebuild the garage in the middle of getting
a divorce, especially when we are selling the house.

What happens in this situation? Who do we owe money back to for the
money paid by the insurance company but never used to repair the damage?

I don't want to ask the insurance company at this point because of
horror stories I have heard about insurance problems after simply asking
questions.

Thanks,
Kelly

If your insurance company called the garage a total loss and paid you
for it, I don't think you owe them anything. You're not actually
obligated to use the money they paid you to repair the insured
structure.... They paid you for the loss of value caused by the
damage, and it's your choice whether to actually repair it.

They could have made you rebuild the garage and not paid you until it
was done, if that's how the policy was written, or paid the contractor
directly. But since they chose to pay you in advance, you're off the
hook, I think.

In article , KS wrote:
Our old garage suffered some storm damage in 2003. The insurance company
totalled it and paid us the amount it was insured for. We patched the
roof and the garage was perfectly usable. We haven't yet gotten around
to rebuilding the garage, and now it looks like there is a divorce on
the horizon. Neither one of us wants to keep the house so we will sell
it. I can't image trying to rebuild the garage in the middle of getting
a divorce, especially when we are selling the house.

What happens in this situation? Who do we owe money back to for the
money paid by the insurance company but never used to repair the damage?

Nobody. They compensated you for the loss of value to your property. In the
absence of state law or provisions in the insurance contract to the contrary,
it's up to you what to do with the compensation: repair, replace, or take a
trip to Hawaii. Of course, if the insurance company declared the garage a
total loss and paid you off for it, and you *don't* totally rebuild it, they
likely won't ever pay any future claims on that garage.

When you sell the house, you will receive less money for it than you would if
it had a newly-rebuilt garage. That difference, compared with what the
insurance company paid you, ought to be about a wash.

--
Regards,
Doug Miller (alphageek at milmac dot com)

Nobody ever left footprints in the sands of time by sitting on his butt.
And who wants to leave buttprints in the sands of time?

"KS" wrote in message
m...
Our old garage suffered some storm damage in 2003. The insurance company
totalled it and paid us the amount it was insured for. We patched the
roof and the garage was perfectly usable. We haven't yet gotten around
to rebuilding the garage, and now it looks like there is a divorce on
the horizon. Neither one of us wants to keep the house so we will sell
it. I can't image trying to rebuild the garage in the middle of getting
a divorce, especially when we are selling the house.

What happens in this situation? Who do we owe money back to for the
money paid by the insurance company but never used to repair the damage?


i think there may be some irs tax issues. if you didn't use the money to
rebuild the garage, it might be considered income, and taxable. we had the
hw heater spew and had damage. i recall something about having 2 or 3 yrs
to use the money to fix the problem or it would be considered income. call
them.

In article , "AllEmailDeletedImmediately" wrote:

i think there may be some irs tax issues. if you didn't use the money to
rebuild the garage, it might be considered income, and taxable. we had the
hw heater spew and had damage. i recall something about having 2 or 3 yrs
to use the money to fix the problem or it would be considered income. call
them.

How could it be income? It's compensation for the loss of value of the
property. His property lost value, and he received the equivalent in cash. No
net increase in assets = no income.

--
Regards,
Doug Miller (alphageek at milmac dot com)

Nobody ever left footprints in the sands of time by sitting on his butt.
And who wants to leave buttprints in the sands of time?

On Tue, 05 Apr 2005 08:26:01 -0400, someone wrote:

What happens in this situation?

NOTHING.

They paid you for your loss. You are even. Now work on splitting the
money (if there is any left) with your soon to be ex along with the
rest of your assets.


Reply to NG only - this e.mail address goes to a kill file.

"How could it be income? It's compensation for the loss of value of the

property. His property lost value, and he received the equivalent in
cash. No
net increase in assets = no income. "

That's correct. There are no income issues here as the compensation
was for the loss incurred. Whether you rebuild it or not doesn't
matter. It's like you paid $20k for a car and it was totalled. The
insurance company pays you $15k for the value at the time of loss.
That isn't income, regardless of what you do with the money.

--

wrote in message
oups.com...
"How could it be income? It's compensation for the loss of value of the

property. His property lost value, and he received the equivalent in
cash. No
net increase in assets = no income. "

That's correct. There are no income issues here as the compensation
was for the loss incurred. Whether you rebuild it or not doesn't
matter. It's like you paid $20k for a car and it was totalled. The
insurance company pays you $15k for the value at the time of loss.
That isn't income, regardless of what you do with the money.

i think it's called a taxable gain from an involuntary conversion.
mine involved rental property. i had a flood loss of 2k from insurance.
i did the work myself, so i didn't cost me 2k to repair the damage, since
labor was added in. if i hadn't spent the rest on the rental property, the
difference was taxable to me.
it also applies to non rental property; you just get less time to spend it.
call the irs.

http://search.irs.gov/pub/query.html...=21&Search.y=2

if link doesn't work: go to www.irs.gov

do regular search for involuntary conversion
use max number returns
choose advanced search on the right in the box (don't ask me why you can't
get the same results from page 1)
check forms/instruction and publications
must contain in the body the phrase involuntary conversion
use max number of returns

you should end up with 52 results. form 4797 and instru 4797 look like
what you need.


jk lassiter chapter 18 from my tax program: if your property is destroyed,
damaged, stolen, or taken by a govt authority, this is considered to be an
involuntary conversion for tax purposes. If you receive insurance or other
compensation that exceeds the adjusted basis of the property, you realize a
gain that may be taxable...... (there are ways to defer it, but i don't
think you did it). replacement period for personal use property is 2
yrs.....

"i think it's called a taxable gain from an involuntary conversion.
mine involved rental property. i had a flood loss of 2k from
insurance.
i did the work myself, so i didn't cost me 2k to repair the damage,
since
labor was added in. if i hadn't spent the rest on the rental
property, the
difference was taxable to me.
it also applies to non rental property; you just get less time to spend
it.
call the irs. "


Well, you have a point, but he still won't owe any immediate tax, it's
very unlikely he will ever owe anything, nor does he have to do
anything except keep records related to the insurance received and
repairs made. What you've pointed out, applies to business property,
not a personal home.

Technically, the insurance proceeds should be deducted from the cost
basis of the home, thereby lowering it. The cost of any repairs
related to the damage to the garage are then added on to the cost basis
when they are made. If they are equal by the time the house is sold,
nothing has changed, the cost basis is the same. If he doesn't fix
it, then the amount received from insurance would get treated as part
of the gain on the sale of the home, assuming there is one. Even then,
for a married couple there is a $500K capital gain exclusion, so unless
the total exceeds that, there is no tax consequence.

On Mon, 11 Apr 2005 03:07:58 GMT, someone wrote:

i think it's called a taxable gain from an involuntary conversion.
mine involved rental property....

Whoa, whoa whoa, you are talking about a business/income property
that you are taking depreciation on. If you in effect "sold"
(involuntarily) a portion of this propoerty for more than it was
"worth" (as basis), then yeah YOU had a gain.

But if a person has a house that they do not write off depreciation
on, and the house is damaged to the tune of $X, then when the insurer
gives them the $X, aren't they even?


Reply to NG only - this e.mail address goes to a kill file.

"v" wrote in message
...
On Mon, 11 Apr 2005 03:07:58 GMT, someone wrote:

i think it's called a taxable gain from an involuntary conversion.
mine involved rental property....

Whoa, whoa whoa, you are talking about a business/income property
that you are taking depreciation on. If you in effect "sold"
(involuntarily) a portion of this propoerty for more than it was
"worth" (as basis), then yeah YOU had a gain.

But if a person has a house that they do not write off depreciation
on, and the house is damaged to the tune of $X, then when the insurer
gives them the $X, aren't they even?

my jk lassiter info doesn't specify that it's only for business/income
property. it doesn't mention anything about depreciation.
in fact it says "replacement period for PERSONAL-USE PROPERTY is 2
years....(paraphrase: business/investment use property gets 2 or 3
years)...for a residence and it's contents involuntarily converted due to a
presidentially declared disaster, it is 4 years" now, i don't know about
you, but that sounds an awful lot like a primary residence to me.

the irs feels that if you don't rebuild, you received income from the
insurance check. bet it also applies to car insurance checks, since
personal-use property isn't necessarily real estate.

"the irs feels that if you don't rebuild, you received income from the
insurance check. bet it also applies to car insurance checks, since
personal-use property isn't necessarily real estate. "


Even the IRS doesn't expect to tax you twice on money you already paid
tax on. In the case of a car, if it was damaged and you get an
insurance payment, you don't owe tax on it, unless the payment was for
more than the car was actually worth, which I've never seen happen.

In fact, quite the opposite is true. Let's say a car was worth $8k and
you can prove it through reasonable means, eg blue book, etc. But the
insurance company only pays you 6.5K. You not only don't owe tax on
the $6.5K, but you have a legitimate $1.5K deductible casualty loss, as
that is the fair market value minus the insurance received. This
happens all the time. What you are suggesting would require someone
who had a watch stolen for example, to go buy another watch, whether
they wanted one or not. This isn't income, by any stretch of the
imagination, it's reimbursement for a loss. Read the sections on
casualty loss.


Here from the IRS Topic 507 Casualty and Theft Losses:

"If your property is damaged by a casualty, you must decrease its
adjusted basis by the amount of any insurance or other reimbursement
that you receive and by the amount of any deductible loss. You must
increase the adjusted basis by amounts you spend on repairs after a
casualty that substantially prolong the life of the property, increase
its value, or adapt it to a different use."

As I read that, the net effect for 99% of homeowners with their home
garage damaged by a storm is no tax consequence at all and certainly
nothing that needs to be reported or filed in the year that it
occurred. If you later sell the home and the gain exceeds $500K for a
married couple, then, and only then, if you didn't spend as much in
repairs as you received from the insurance company, you would owe
capital gains on it.


From 4864:
Gain on Reimbursement
If the amount you receive in insurance or other reimbursement is more
than the cost or other basis of the property, you have a gain. If you
have a gain, you may have to pay tax on it, or you may be able to
postpone the gain.


The sections you're referring to in JK Lassiter are relevant to
postponing a gain. That would have relevance here if the fellows
entire house was destroyed and he didn't rebuild/replace it. Then he
might have a capital gain, if the insurance payment, minus his basis,
was over $500K. The treatment would be similar to having sold it for
the insurance amount.

wrote in message
ups.com...

"the irs feels that if you don't rebuild, you received income from the
insurance check. bet it also applies to car insurance checks, since
personal-use property isn't necessarily real estate. "


Even the IRS doesn't expect to tax you twice on money you already paid
tax on.

sure they do. that's what death taxes are. and let's not even get into
taxes on phantom income.

In the case of a car, if it was damaged and you get an
insurance payment, you don't owe tax on it, unless the payment was for
more than the car was actually worth, which I've never seen happen.

In fact, quite the opposite is true. Let's say a car was worth $8k and
you can prove it through reasonable means, eg blue book, etc. But the
insurance company only pays you 6.5K. You not only don't owe tax on
the $6.5K, but you have a legitimate $1.5K deductible casualty loss, as
that is the fair market value minus the insurance received. This
happens all the time. What you are suggesting would require someone
who had a watch stolen for example, to go buy another watch, whether
they wanted one or not. This isn't income, by any stretch of the
imagination, it's reimbursement for a loss. Read the sections on
casualty loss.


Here from the IRS Topic 507 Casualty and Theft Losses:

"If your property is damaged by a casualty, you must decrease its
adjusted basis by the amount of any insurance or other reimbursement
that you receive and by the amount of any deductible loss. You must
increase the adjusted basis by amounts you spend on repairs after a
casualty that substantially prolong the life of the property, increase
its value, or adapt it to a different use."

As I read that, the net effect for 99% of homeowners with their home
garage damaged by a storm is no tax consequence at all and certainly
nothing that needs to be reported or filed in the year that it
occurred. If you later sell the home and the gain exceeds $500K for a
married couple, then, and only then, if you didn't spend as much in
repairs as you received from the insurance company, you would owe
capital gains on it.


From 4864:
Gain on Reimbursement
If the amount you receive in insurance or other reimbursement is more
than the cost or other basis of the property, you have a gain. If you
have a gain, you may have to pay tax on it, or you may be able to
postpone the gain.


The sections you're referring to in JK Lassiter are relevant to
postponing a gain. That would have relevance here if the fellows
entire house was destroyed and he didn't rebuild/replace it. Then he
might have a capital gain, if the insurance payment, minus his basis,
was over $500K. The treatment would be similar to having sold it for
the insurance amount.

i spoke to the irs in my situation. the check was 2k for flooding to
replace carpeting, wallboard, insulation, paint, etc plus labor. since i
did the work myself, i didn't have to spend all the money on the repair.
when the form came up in the program, i called the irs to find out info
because it showed that i might have taxable income. i was told that i had
to spend all the money on the house in some way, or the difference was
taxable income. i couldn't believe it either. this is a for a rental
property, but even if it's for a personal residence, call the irs to be
sure.

how do you figure the basis of part of a house for this purpose?

"this is a for a rental
property, but even if it's for a personal residence, call the irs to be

sure. "

Unfortunately, even that's no guarantee of much of anything. Every
year around tax time, the media is full of reports of basic questions
sent to the IRS as part of a test. Routinely they come back about
25-33% wrong, and that's on realtively simple questions. Money
magazine regularly sends out simple to complex returns to a bunch of
tax preparers/accountants. The range of tax due is unbelievable. Not
unusual to see answers of tax due from 5K to 25K on like a 100K return.
The best source for this would be some tax court decisions, which you
would think there must be.

"how do you figure the basis of part of a house for this purpose? "

I'd say you just adjust the basis of the whole house, which is what the
507 advice is saying. It's as if you put a new roof on or depreciated
the use of part of the home for an office. It results in a change in
the basis of the asset, but no immediately taxable event. If the
basis was at $100K before the damage, you got $7k, spent $5K, the new
basis is $98K. I think the problem of figuring out what the basis of
part of the asset was, what it's new value is, etc is a good reason why
it gets very complicated trying to treat it as a current tax event,
rather than just adjusting the basis.

I agree this particular issue doesn't seem to be well addressed
anywhere and some of it appears to be contradictory. The sections you
are referring to about replacement period aren't very clear and seem to
contradict the casualty loss 507 section. Also, the examples I saw
talking about time limits, used total destruction cases. I think that
makes sense, because if you don't replace a house that's destroyed,
it's similar to it having been sold, which could be taxable if the gain
is large enough.

Unless it were some huge amount, I would go with the 507 advice and
treat it as an adjustment in basis. It's very unlikely the IRS would
ever challenge anyone on it, particularly since there is nothing
reported, matched, etc. And for a home, perhaps the most important
part in the end is that unless the gain is over $500K, I don't see how
you could owe anything anyway.