Ask Liz Weston

Get smart with your money

homeowners insurance

Q&A: Can insurers require you to buy a membership?

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Dear Liz: I have my homeowners and auto insurance with the auto club. For the past few years, I have called them about their $59 yearly membership fee. I advised them that I did not need any of their services, as my last three new cars have their own roadside service. I was shocked to find out that if I do not pay the $59 membership fee, my home and auto insurance will be canceled.

How is this legal, and why must I buy something I do not need to be covered for home and auto insurance? Also, I cannot pay my home and auto insurance by credit card so I can get my points. Again, is this legal?

Answer: Yes and yes.

The answer to your first question is embedded in the phrase “membership fee.” The regional auto clubs that make up the American Automobile Assn. are mutual-benefit membership organizations created to provide products and services directly to their (wait for it) members.

In addition to roadside assistance and insurance, clubs typically offer travel planning, DMV services such as vehicle registration renewals, proprietary financial products and discounts on hotels, theme parks and movie tickets.

If you don’t want any of those things, then you don’t have to be a member. If you want access to your club’s insurance coverage, though, you’ll need to pony up.

As to your second question, businesses and organizations in the U.S. are typically free to determine which payment methods they’ll accept. If they don’t want to take credit cards, they don’t have to.

Q&A: How do I claim fire-damage losses on my taxes?

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Dear Liz: My home in Pacific Palisades is still standing after January’s fire, but was damaged by smoke and ash. The remediators deemed hundreds of personal property items unsalvageable. Our insurance company is paying us a highly depreciated amount for these items, with the full amount to be received upon the actual purchase of each replacement.

Since we won’t replace every item, we’ll end up with a sizable loss, which I understand can be claimed on our 2024 or 2025 tax return. I’m concerned that we won’t know the total amount of loss by the end of 2025. Could you please discuss how to handle this?

Answer: Casualty losses are deductible in the year you sustained the loss. That’s typically the year the loss occurred, although you may be able to deduct the loss in the previous tax year when it’s part of a federally declared disaster, such as the January 2025 wildfires in Los Angeles, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

However, you aren’t considered to have sustained a loss if there remains a reasonable prospect of recovery through a claim for reimbursement, Luscombe says. You can’t take the deduction until the tax year in which you can determine with reasonable certainty whether or not you will receive such reimbursement.

If you won’t know the amount of the loss by the end of 2025 due to this uncertainty, you can wait to deduct the loss until the year in which the amount of reimbursement is known, Luscombe says.

For personal use property, the deductible loss is the lesser of the adjusted basis of the property (typically its cost) or the decrease in the fair market value of the property as a result of the casualty (which may be determined by an appraisal or the cost of repairing the property), Luscombe says.

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

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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.

Q&A: Does insurance cover a home in a living trust?

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Dear Liz: All of our insurance policies list my name and that of my husband. After the recent devastating Los Angeles fires, I heard from friends that we should add the name of our living trust to our home insurance policy because our house is in the trust. Otherwise, they say, some insurance companies may not cover loss or damages to it due to the discrepancy in the names, even if the trust has both of our names as trustees. Would you please confirm this?

Answer: Yes. If your home is in a trust, your insurance policies should list your trust as an “additional insured.” Insurance companies vary in their contract language, but you don’t want to find out after the fact that you aren’t covered.

Q&A: Shake, rattle and … roll the dice without earthquake insurance?

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Dear Liz: I live in Southern California and my homeowners insurance renews at the end of August. Should I consider buying earthquake insurance?

Answer: Insurance is meant to protect against catastrophic losses that we couldn’t easily pay out of pocket.

If you don’t have much equity in your home, or you’re willing to walk away from the equity you do have, then you can forgo earthquake insurance. Otherwise, you need the coverage.

The same is true for flood insurance, which is also not covered by the typical homeowners policy.