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homeowners insurance

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: Does insurance cover a home in a living trust?

February 10, 2025 By Liz Weston

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.

Filed Under: Insurance, Q&A Tagged With: homeowners insurance, Insurance, living trust, revocable living trust

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

August 7, 2024 By Liz Weston

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.

Filed Under: Insurance, Q&A Tagged With: earthquake, earthquake insurance, flood, flood insurance, homeowners insurance, homeownership

This week’s money news

June 24, 2024 By Liz Weston

This week’s top story: What impacts bank account rates Mid-2024? In other news: 7 tips to prepare your house for hurricane season, weekly mortgage rates trend lower, and PAYE.

What Impacts Bank Account Rates Mid-2024?
The Fed rate and banks’ competition for consumer deposits play key roles.

7 Tips to Prepare Your House for Hurricane Season
This year’s hurricane season could bring over a dozen hurricanes to U.S. coasts — is your home ready for the wind and rain?

Weekly Mortgage Rates Trend Lower; Report Reveals Housing Strain
Mortgage rates continued slipping downward this week, in the absence of any major market movements or economic data releases.

Graduate Borrowers, Consider This Student Loan Plan Before July 1
If you have graduate debt and qualify for PAYE, consider applying before July 1, when PAYE will permanently close to new enrollment. Two other repayment plans will also limit enrollment in July.

Filed Under: Liz's Blog Tagged With: homeowners insurance, hurricanes, Insurance, mortgage rates, natural disasters, savings account rates, Student Loans

Monday’s need-to-know money news

September 20, 2021 By Liz Weston

Today’s top story: Charged an overdraft fee? Ask for a refund. Also in the news: A new episode of the Smart Money podcast on DIY investing, beating your summer revenge shopping debt, and what every homeowner should know about trampolines.

Charged an Overdraft Fee? Ask for a Refund
It never hurts to ask.

Smart Money Podcast: DIY Investing and Lightning Round Questions
What it is, how to do it and any potential risks.

Beat Your Summer ‘Revenge Shopping’ Debt
Paying for your return to society.

What Every Homeowner Should Know About Trampolines
If you’re not covered, it may be hard to bounce back from a big liability claim.

Filed Under: Liz's Blog Tagged With: DIY investing, homeowners insurance, overdraft fees, Smart Money podcast, summer revenge spending, trampolines

Monday’s need-to-know money news

February 22, 2021 By Liz Weston

Today’s top story: How to get the most home insurance help after a winter storm. Also in the news: A new episode of the Smart Money podcast on filing your taxes early and tapping into your home equity, 8 ways to take your credit card rewards to the next level in 2021, and how to get relief with your federally backed mortgages.

How to Get the Most Home Insurance Help After a Winter Storm
Talking to your insurer and documenting everything will help you manage and recover from serious storm damage.

Smart Money Podcast: Filing Taxes Early and Tapping Home Equity
Why you probably want to file your taxes sooner rather than later.

8 Ways to Take Your Credit Card Rewards to the Next Level in 2021
With some extra steps — like an inventory of your wallet, a chat with your issuer, and a willingness to track and stack — you can squeeze more value from points and miles.

How to Get Relief With Your Federally Backed Mortgages
There’s a new extension.

Filed Under: Liz's Blog Tagged With: credit card rewards, homeowners insurance, mortgage relief, Smart Money podcast, Taxes, winter storm

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