Is recoverable depreciation taxable income?
Short answer. For your own home, recoverable depreciation is usually not taxable income, because it is part of an insurance reimbursement for a loss and you spend it restoring the property. A taxable gain arises only in unusual cases where total insurance proceeds exceed your adjusted basis in the damaged property, and rental property follows different rules, so check with a tax professional.
Why the second check is not treated as earnings
The depreciation check is the second half of one insurance payment for one loss. Tax rules treat insurance reimbursement for property damage as offsetting your loss, not as income. Splitting the payment into two checks is an insurance mechanic, not a separate tax event.
When a gain can happen
A gain is possible when total reimbursement exceeds the adjusted basis of the damaged property, which can happen on a house bought decades ago for far less than today's rebuilding cost. Even then, federal rules on involuntary conversions often let you postpone the gain when you use the money to repair or replace the property within the allowed period.
Rental and business property
- The insurance money is weighed against the damaged roof's remaining basis to figure any casualty gain or loss.
- The new roof is capitalized and depreciated, over 27.5 years on a residential rental.
- Uncovered costs, such as your deductible, may be handled differently than on a personal home.
Keep these records
- Both payment letters and copies of the checks
- The final estimate and any supplements
- The roofer's paid invoice
- Your purchase records and past improvements
Related: how recoverable depreciation works on a roof and ACV vs RCV.