Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Home Insurance SettlementThe short answer to this question is that yes, home insurance settlements are sometimes taxable. Life insurance is typically the only non-taxable settlement a person may receive.

Of course, none of the below is specific personal tax advice as you should always consult with your own tax professional. That being said, there are specific circumstances that alter how the homeowners insurance settlement is taxed and those are explained in detail below.

Read on to learn all about the scenarios in which home insurance settlements are taxable or not taxable and then be sure to also enter your zip above to compare free insurance quotes!

Home Insurance Settlements & Capital Gains Tax

If you receive less in the settlement than the total amount you have paid for the home (this includes the original cost and any money you put into the house for repairs or improvements) you can use this loss as an itemized deduction. If you receive more than the amount you put in, then you will be charged the capital gains tax.

For example, say you purchased your home for $110,000 and put an additional $30,000 in for improvements. If your home burns down and you settle for $100,000 with your insurance company, the $40,000 loss can be a deduction on your Schedule A. On the flip side of that, in the event the company gives you, say, $160,000. The $20,000 difference between what you settled for and what you actually put into the home must be counted as a capital gain.

Of course, while it can happen, it is a very rare occurrence that the insurance company will pay you more than what you put into the home. Most of the time, the company will try to settle for less. And, unfortunately, most of the time homeowners are not aware of their rights and accept the settlement that is probably not as much as they deserve.

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How do you get what you are actually owed?

Well, for one—understand your policy! Know what your policy covers, and whether it is a replacement cost policy (replaces item or material for something of the same quality) or if it is an actual cost policy (it simply pays you what the item was worth at the time of loss). It is your job to know exactly what kind of policy yours is. Do not let a confusion about your policy be what costs you either money or grief.

Okay, now say you know exactly what your policy covers, and you are completely comfortable with it. After the accident/event/disaster occurs, take pictures! Have proof in photos of both what the property looked like before the accident, and then have even more detailed pictures of the property after the accident. This will likely be required of you in most cases, anyway, because adjusters will have to turn in some photos with their reports on your claims, so make sure that you have photos that accurately display the actual damage. Take your own if you feel you need to and if it makes you more comfortable.

Contact Your Insurance Company

Another thing you will want to do is contact your company as soon as possible to start the claims process. There will likely be rules set up by your insurance company that dictate the time frame you have to file your claim. There will also be state laws that govern how long your insurance company can take before they settle the claim, which you will probably want to make yourself aware of.

Also, make sure that you are in contact with the company directly, rather than with just your local office, which really serves mainly to sell insurance policies.

Stay in contact with your company—call often. If there has been a huge disaster in the area, adjusters will likely be swamped with claims, so be polite. Don’t, however, be afraid of seeming like a “pest.” This is your home that is damaged, and your home is your investment. You are entitled to be as persistent in getting it taken care of as is required.

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Get Outside Counsel

One of the most important things, always, is to have accurate estimates provided by neutral experts (i.e. contractors who are not immediately affiliated with the company). If you get an estimate from an adjuster that you think seems too low, get more opinions. You will probably have to pay out of pocket for these consultations with local contractors, but it could save you a huge amount of money in the long run.

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Home Insurance Settlement Tax Reporting

The settlements you reach can affect your taxes that year, in one way or another. If what the insurance gives you for any claim is above the actual cost of replacement, you legally have to file that as a gain.

Any amount that you have to pay out of your pocket between what the insurance company gave you and what the actual replacement cost was can be counted as a financial loss that year.

All you can do is to be as aware of what your policy covers and what your home and/or the items in it is actually worth. To find and compare the best home insurance rates just enter your zip code now!