Insurance Claim Proceeds

I am Fred Cohen of the Villa Nova Homeowners Association of Boca Raton Florida. I am a member of the Appeals Committee.

I am trying to find out if Insurance Claim Proceeds should be treated as income or as an offset to Insurance Expense.

I would appreciate any input on the bookkeeping convention for the above situation.

Fred, our expert accountant is not available for consultation but I am sure we would record this as income as we do with all incoming monies. Meanwhile, for tax purposes I do not think this is a taxable item for a non-profit HOA since it is used to pay to replace the item(s) insured.

I work for an accounting firm as a tax preparer.

Insurance proceeds are not normally considered taxable income. However, they must be used to reduce any claim for loss. Assume you incur a property loss of $10,000. If you receive an insurance settlement of $8,000 for that loss, you can only claim the difference of $2,000 as a deductible property loss.

It gets a little complicated. Generally, if your insurance reimbursement exceeds your adjusted basis for the property, you must report the difference as a gain. Whether it is a short-term or long-term gain depends on how long you have had the property. Mind you, the adjusted basis has nothing to do with what it may cost you to repair the property. In simple terms, your adjusted basis is what you paid for the property, plus the cost of any improvements (not the cost of any repairs to maintain value), less the loss in value as the result of a casualty loss. Also, if you took a deduction for the loss in a prior year and received reimbursement in a later year, you will have to either file an amended return for the prior year, or, if it is too late for that, you may have to claim what you deducted in a prior year as income in the year you received reimbursement.

It sounds to me like your situation is complicated enough that you should consult a local tax adviser who can review your previous returns and actual situation and figures with you.

Typically, an insurance company will reimburse you the actual cost of repairs, or the present fair market value, whichever is less, minus any deductible. Thus, the more common case is one where your cost of repair or replacement will be more than any insurance payment you receive, so you would not have any taxable income.