Are Hurricane Insurance Claim Proceeds Taxed?

Taxes are never fun. When a natural disaster is added to the mix, it can make them even more stressful than usual for those looking to recover from hurricane damage. If you’ve received compensation from an insurance policy for damage caused by a hurricane, you might be wondering if you need to set aside some of that money for tax purposes.

Under most circumstances, money that a person obtains for a hurricane insurance claim is not taxable. However, there are situations that an insurance settlement can be taxable.

How Hurricane Insurance Claim Payouts & Taxes Work

Generally, insurance claim payouts are meant to pay a person for the exact amount of damage that they sustained during a storm. For example, if a person has damages that cost $30,000, they should receive that much money in reimbursement to cover the repairs. Making a profit off an insurance claim is the only time that proceeds are taxable. However, overclaiming damages or exaggerating the value of the damaged property is considered insurance fraud. So, those profiting from an insurance claim have more than taxes to worry about!

However, there is one exception that causes profits from an insurance claim that claimants should know about.

Involuntary Conversion Gains, Insurance, & Taxes

In some instances, the amount that an insurance policy pays out can result in profit for a person who has made a fair and honest claim of losses. This is known as an involuntary conversion gain and it happens when a property appreciates in value between the time it was bought and the time it was damaged.

For example, a person might have bought a home for $200,000. As years pass, that home’s value might increase. If a hurricane destroys that home after it appreciated, the owner would be able to make a claim based on the home’s current value rather than the price it was purchased for. In this instance, the policyholder could receive $500,000 in reimbursement, resulting in a profit over their initial purchase of $200,000.

Generally, this involuntary conversion gain must be reported as taxable income unless:

  • That money is used to repair or replace the property
  • A special tax election is made to defer the gain

If you have an involuntary conversion gain that came from a hurricane insurance claim, it’s best to speak with a finance professional to determine the right way to report it for tax purposes.

Call (888) 493-1629 If You’re Having Trouble with an Insurance Claim

If you're struggling to receive fair compensation with your hurricane insurance claim, Arnold & Itkin is ready to help. We’re a Houston law firm that was standing by after Hurricane Harvey struck and we’re here to make sure our neighbors throughout the Gulf Coast can rebuild. If you’re struggling with a valid hurricane claim, we’re ready to help you hold the insurance company accountable. Find out how we can help today during a free consultation at (888) 493-1629.

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