When you suffer a property loss, and it is covered by business or homeowners insurance, you can typically expect to receive some reimbursement under your insurance policy. Although you are receiving money, it isn't always treated as income under IRS tax laws. Several factors affect how you will report property insurance reimbursements on your tax return.
Calculating Actual Loss
Property loss can be treated as a deductible expense. First, you have to determine the adjusted basis of the property in question by subtracting depreciation and salvage values from the cost of the property and cost of any improvements. Once you've calculated your adjusted basis, subtract insurance reimbursements to find the amount that can be reported as a deductible expense.
Reporting Insurance Reimbursements for Property Value
You will have to report reimbursements, whether you have already received them or not, to calculate the amount of property loss that will be deductible. If your reimbursement exceeds the amount of your adjusted basis, the excess amount is considered to be a gain. Subtract the adjusted basis from the total amount of reimbursement received, including any monies used to pay off mortgages or liens on the lost property.
Reporting Insurance Reimbursements for Living Expenses
If you received reimbursements to cover living expenses while displaced from the lost property, these payments are treated differently. They are not deducted from the adjusted basis and do not affect the amount that will be deductible. To report these reimbursements, subtract any increase in living expenses from the amount paid to you by the insurance company. Any excess is then reported as taxable income.
Forms for Reporting Reimbursements
If you suffered a loss of personal property, report reimbursements on 1040 Schedule D and Form 4684. If business property was involved, the reporting takes place on Form 4684 and Form 4797. Individuals who suffer a loss of income-producing property or property used to perform services as an employee use 1040 Schedule A.