Is an insurance payment for roof damage taxable?

Why it is usually not income

Insurance proceeds for a casualty are a reimbursement. Under IRS rules they reduce your loss, and they produce a gain only if they exceed your adjusted basis in the damaged property. For a primary home, the basis of the house is usually far larger than a roof payment, so a roof check does not create taxable income.

Basis bookkeeping

• Insurance reimbursements reduce your home's basis.
• Money you spend restoring the property adds back to basis.
• When you repair with the insurance money, these usually offset.
• If you keep the money and do not repair, your basis ends up lower, which can matter when you sell.

Rental and business property

On a rental, insurance money for the roof interacts with depreciation already taken. Reimbursements above the old roof's remaining adjusted basis can produce a gain, which you may be able to postpone by replacing the property. The new roof is then capitalized and depreciated. These rules are technical, so involve a tax preparer.

Paperwork to keep

• The insurer's estimate and payment letters
• The contractor's invoice and proof of payment
• Proof you paid your deductible

IRS Publication 547 covers casualties and reimbursements. This page is general information, not tax advice.

Related: recoverable depreciation on a roof and mortgage company on the check.