Here's a Heads-up on Taxes after Disaster Settlements

November 5, 2007
The Wall Street Journal of November 1 had an informative article concerning the tax fallout from receiving insurance proceeds after a disaster. Most of us are in such shock after a major property loss, that the issue of tax consequences is not even considered. This writer, Arden Dale, suggests that knowing the rules can save money and heartache.
Taxes may be owed if the insurance company pays out even one dollar more than the cost basis of the house. The "cost basis" of the home is the purchase price plus any major improvements that were made. A disaster that occurs after a period of appreciation in home values may result in a pay out much greater than the "cost basis" if your homeowners insurance policy was up to date with the current value.
The treatment that an insured person can get in a natural disaster is for an "involuntary conversion". The gain you might receive from the insurance payout is given leeway especially if the disaster is declared federally.
If you can obtain a copy of this article, it is most informative. It alerts a homeowner to consult with a tax professional in order to comply with the rules that protect a disaster victim from undue taxation.