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disaster

Q&A: Losing a home in a fire, then being hit with a ‘casualty gain’

March 31, 2025 By Liz Weston

Dear Liz: My house was burned down in the Palisades fire. I lived in the house for 25 years and lost everything. I thought there may be a silver lining with tax deductions. Much to my surprise, I am supposed to use the purchase price from 25 years ago as my adjusted cost basis. The insurance settlement is not going to be enough to rebuild but is more than my cost basis. I will end up with “casualty gain” instead. Is this possible?

Answer: After losing your home and finding out you were underinsured, the news that you might have a taxable gain must have been a gut punch.

The IRS calls it an “involuntary conversion” when your property is destroyed and you receive insurance proceeds. If the insurance payment exceeds your tax basis in the property, that’s known as a casualty gain.

You can defer tax on this gain if you use the insurance payout to rebuild or buy a replacement property, says Mark Luscombe, a principal analyst with Wolters Kluwer Tax & Accounting. Normally you’d have two years to use the insurance proceeds, but in a federally declared disaster such as the Los Angeles fires, the deadline is extended to four years.

The IRS may be willing to further extend the deadline under some circumstances, such as contractor delays, Luscombe says. But don’t count on an extension if you’re simply unable to find a replacement property.

If you do purchase a new home elsewhere, any gain from the sale of the lot where your previous home stood also would have to be reinvested in the new home to avoid a current tax on the gain, Luscombe says.

However, the home sale tax exclusion also applies to involuntary conversions. The exclusion allows you to shelter up to $250,000 of gains ($500,000 if married filing jointly) on a sale or involuntary conversion, as long as you’ve owned and lived in the property as your primary residence for two of the last five years. So you could exclude that amount of gain and defer the rest if you rebuild or find a replacement property, Luscombe says.

This is complicated territory, so please make sure you hire a tax pro to guide you.

Filed Under: Insurance, Q&A, Real Estate, Taxes Tagged With: capital gains, capital gains on a home sale, capital gains tax, casualty gain, deferring casualty gain, disaster, home sale, home sale exclusion, homeowners insurance

Q&A: Hard copies, thumb drives and the cloud: How to handle vital records when it’s time to flee

February 4, 2025 By Liz Weston

Dear Liz: We are assembling our important document to-go box with the typical things advised should we need to evacuate, such as birth and marriage certificates, passports, insurance documents, mortgage statements, etc. Many of the documents can be accessed online, so I wondered about pay-off statements from old loans and mortgages. Is it important to take copies of those? Also, what about grant deeds from previous properties that we no longer own?

Answer: In a disaster, you’ll need information to help you establish your identity and document what you currently own. Focus on safeguarding the most important paperwork and figure you can recreate the rest if necessary.

Start with documents that would be time-consuming or a hassle to replace, such as passports, birth and marriage certificates, immigration records, military records, vehicle titles, home inventories, appraisals, home plans or blueprints, recent tax returns and wills or other estate planning documents. The originals should be stored in a water- and fireproof place, such as a home safe or other secure location.

Consider storing copies of these documents, along with photos of your driver’s license and vehicle registration, on an encrypted thumb drive in your go bag or in a secure cloud-based storage service (Everplans is one option.) You could put physical copies in your evacuation bag, but much of the information could be helpful to an identity thief if stolen so you’ll have to weigh convenience against security.

Insurance policies are usually accessible online, but you may want to include your insurance companies’ contact information and policy numbers.

Also consider digitizing any family photos that aren’t already stored in the cloud. You may not have time to grab albums, and disaster victims often lament not having copied irreplaceable photos.

Filed Under: Emergency Preparedness, Legal Matters, Q&A Tagged With: disaster, disaster kit, emergency kit, emergency preparedness, go bag, to-go bag

This week’s money news

December 18, 2023 By Liz Weston

This week’s top story: How to overcome the challenges buying a house in 2024. In other news: How to put a ting on it and save for a house, too, what documents to protect and how if a disaster strikes, and how the Fed affected your savings account in ’23 and what’s next.

Buying a House in 2024: What to Expect
The market remains tough for buyers, but there’s still no time like the present to start shopping.

How to Put a Ring on It and Save for a House, Too
Using practical budgeting strategies, couples can plan a wedding without giving up their homebuying dreams.

Would Your Documents Survive a Disaster? What to Protect and How
Floods, fires, historic storms — make sure you’ve got your important papers in a safe spot.

How the Fed Affected Your Savings Account in ’23 and What’s Next
Savers end 2023 on a high note. But a Fed rate pause may extend to 2024.

Filed Under: Liz's Blog Tagged With: buying a house in 2024, disaster, Fed rate 2023, protecting documents, savings account 2023, wedding and homebuying 2024

Tuesday’s need-to-know money news

October 1, 2013 By Liz Weston

Zemanta Related Posts ThumbnailHow to win the retirement lottery, getting help with your finances, and what boomers need to know about Obamacare enrollment.

Open A 401(k) And Win The Retirement Lottery
Opening a 401k as soon as possible could be the key to a prosperous retirement.

How Can I Get Help With My Finances?
How to take the important first step.

Protect Your Financial Life in the Event of a Disaster
Sharknado season is just around the corner.

Absolutely everything you need to know about how the government shutdown will work
How the government shutdown may affect you.

A boomer’s guide to Obamacare enrollment
The health care exchanges officially open today.

Filed Under: Liz's Blog Tagged With: 401(k), disaster, help with finances

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