18.16 Insurance Reimbursements

You reduce the amount of your loss (18.13) by insurance proceeds, voluntary payments received from your employer for damage to your property, and cash or property received from the Red Cross. Also reduce your loss by reimbursements you expect to receive in a later year (18.2). However, cash gifts from friends and relatives to help defray the cost of repairs do not reduce the loss where there are no conditions on the use of the gift. Also, gifts of food, clothing, medical supplies, and other forms of subsistence do not reduce the loss deduction nor are they taxable income.

Cancellation of part of a disaster loan under the Disaster Relief Act is treated as a partial reimbursement of the loss and reduces the amount of the loss. Payments from an urban renewal agency to acquire your damaged property under the Federal Relocation Act of 1970 are considered reimbursements reducing the loss.

Insurance payments for the cost of added living expenses because of damage to a home do not reduce a casualty loss. The payments are treated as separate and apart from payments for property damage. Payments for excess living costs are generally not taxable (18.17).

Passive activity property loss reimbursements.

A reimbursement of a casualty or theft loss deduction is not considered passive activity income if the original loss was not treated as a passive deduction (10.1). The reimbursement may be taxed (11.6).

Realizing a gain from insurance.

If you receive insurance proceeds in excess of your adjusted basis for the property, you generally realize a gain, which you may be able to defer by buying replacement property (18.19).