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FAQs for Disaster Victims - Taxable State Recovery Payments

(03/09) Q: How do reimbursements from state funds to compensate for property damage that are received in a subsequent year affect a homeowner’s casualty loss and basis computations?

A: If a taxpayer properly claimed a casualty loss deduction and in a later year receives reimbursement for the loss, the taxpayer reports the amount of the reimbursement in gross income in the tax year it is received to the extent the casualty loss deduction reduced the taxpayer’s income tax in the year in which the taxpayer reported the casualty loss deduction. If the subsequent year reimbursement exceeds the amount of the casualty loss deduction, the taxpayer reduces basis in the property by the amount of such excess. In addition, the taxpayer includes such excess in income as gain to the extent it exceeds the remaining basis in the property, unless such gain can be excluded from income or its recognition can be deferred. Also see pages 6-7 of Publication 547, Casualties, Disasters, and Thefts, in the section entitled “Insurance and Other Reimbursements.”

Q: What if an NOL was generated on the original return, would a taxpayer amend all amended returns and Form 1045?

A: No. If a taxpayer properly claimed a casualty loss deduction and in a later year receives reimbursement for the loss, the taxpayer reports the amount of the reimbursement in gross income in the tax year it is received to the extent the casualty loss deduction reduced the taxpayer’s income tax in the tax year in which the taxpayer reported the casualty loss deduction or reduced income tax in a prior year as a result of an NOL caused by a casualty loss deduction. See the preceding question for additional guidance if the subsequent year reimbursement exceeds the amount of the casualty loss deduction. Also see pages 6-7 of Publication 547, Casualties, Disasters, and Thefts, in the section entitled “Insurance and Other Reimbursements.”

References/Related Topics

In computing the "tax benefit," you are advised to review Publication 525, Taxable and Nontaxable Income

Page Last Reviewed or Updated: 08-Apr-2014