Insurance

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Posted By: Bob Casmer

Brian,

Unfortunately, the answer to your question could very well be yes, some of the proceeds from insurance could be taxable. You said you had about $10K worth of cards, for which you received about $1K in insurance proceeds. This is a loss of about $9K. Then you had comics, jewelry, electronics, etc. for which you paid about $30K and received insurance proceeds of about $80K, resulting in a net gain of around $50K. For tax purposes, you would offset the gains and losses to determine your net result. In your case, about a $41K gain ($50k - $9k). Your loss falls under treatment for what is known as an "involuntary conversion". Your collectibles and other property were involuntarily converted to cash received from the insurance company. Because the conversion was not voluntary on your part, there is some relief from taxation which sort of follows the "like-kind exchange rules" but, you would have to take the proceeds received from the insurance company and try to replace all the property you had stolen with similar, like-kind assets. Anything you left in the form of cash, or used to buy something else that did not replace what was stolen (up to the approximate $41K of gain you realized from the insurance), would be taxable as a capital gain on Schedule D of your 1040 return. The gain would be long-term if the items stolen were owned more than 1 year. For an involuntary conversion like yours, the replacement period would generally be two tax years after the end of the tax year in which you realized a gain from the involuntary conversion. So if your stuff was stolen in 2008, it looks like you have till the end of 2010 to replace your property and not have any tax due. But remember, you would have to spend the entire amount of insurance proceeds to totally escape gain. Whatever you kept in cash, or used to buy anything else that wasn't like-kind, replacement property, would be taxable gain to you, up to the approximate $41K net gain you realized.

Also, to defer the recognition of the gain you must actually report the details of the gain on your tax return in the year in which the gain is recognized/received. The required statement should include the date and details surrounding the involuntary conversion, details of what was stolen/involuntarily converted, the insurance proceeds received and the potential gain to be recognized. If you've already acquired some of the replacement property at the time you file your tax return, you'll need to include a description of that replacement property, and probably what you've paid for it. For any items you'll be replacing after the year of the theft, you'll need to state that you intend to replace the balance of that property within the specified replacement period.

These are the formal rules in a nutshell. You should talk to your tax advisor to get into more specifics surrounding your particular case. Also keep in mind, I don't believe the insurance company is required to forward any information to the IRS regarding claims paid. Hope this helps.