When your home insurer cuts you a check, it isn't usually taxable. The IRS doesn't count insurance payouts as income -- they're a reimbursement for the money or property value you lost. If your insurance pays you more than the cost of the property, though, you may owe the government some money.
To know if the insurance check is taxable, you'll need to figure the adjusted basis of whatever was stolen or damaged. With a house, for instance, the basis is the purchase price, adjusted for major improvements and other changes. A $10,000 kitchen remodel adds $10,000 to your basis. If you inherit property, your basis is what it was worth the day the owner died, rather than what the owner paid for it.
If your ruined house or your stolen collectible has risen in value, your insurance check may be more than the basis. In that case, you may have taxable income. Subtract the adjusted basis from your insurance reimbursement and whatever's left, if anything, is taxable. You report it as a capital gain on Schedule D, and on Form 4684. Usually you report the income in the same year you suffered the loss.
If your insurer paid out because your main home was destroyed, you may be able to exclude the gain from taxes. Provided you lived there for two of the previous five years, you can exclude $250,000 in gain or $500,000 if you file a joint return, just as you could if you sold it. Suppose you bought the home for $200,000 but it was worth $230,000 when it burned down. If your insurer cuts you a $230,000 check, you have no tax liability, despite the $30,000 gain.
If you use your insurance check to replace your lost property -- buying a new rental house to replace an old one, for instance -- you may be able to postpone capital gains tax. The property has to be the same sort: if you lost your home, you can't avoid gain if you buy a grocery store instead. You have to buy the replacement after you suffered your loss and within two years of the end of the year in which you got the check. You then don't pay capital gains until you sell the new property.
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