- Step 1: File With County For Property Tax Reassessment
- Step 2: Understand Insurance Payouts
- Step 4: Gain/Loss on Sale of Property After Casualty Loss
- Step 5: Transfer Lower Property Tax Base to New Home
This is for informational purposes only and not tax advice. Please consult with a tax advisor.
Disaster Casualty Loss/Gain Calculator
Important:
Reinvesting all the proceeds from insurance can eliminate the casualty gain. According to 26 U.S. Code § 1033, if property is involuntarily converted into money, the gain is recognized only to the extent that the amount realized exceeds the cost of the replacement property.
Replacement Period: If choosing to postpone any gain from the reimbursement, the period to purchase replacement property is extended until 4 years after the end of the first tax year in which any part of the gain is realized.
Note: For casualty losses in federally declared disaster areas, a $500 floor applies. This means that if the Preliminary Casualty Loss (Lesser of Adjusted Basis or FMV Decline minus Insurance Reimbursement) is less than or equal to $500, no casualty loss is recognized; if it exceeds $500, $500 is subtracted from the loss.
Examples
Example 1: Basic Loss Calculation with Insurance Reimbursement and Mortgage
Scenario: John’s home, with an adjusted basis of $200,000, is destroyed by a fire in a federally declared disaster area. The FMV before the fire was $250,000 and after the fire, the FMV is $0. John receives a $180,000 insurance reimbursement and has an outstanding mortgage of $150,000. The lender holds the insurance proceeds in escrow to pay off the mortgage, and any excess funds are released to John as cash.
Step 1: Decrease in FMV = FMV Before ($250,000) – FMV After ($0) = $250,000.
Step 2: Lesser of Adjusted Basis or FMV Decline = the lesser of the property’s Adjusted Basis ($200,000) or the Decline in FMV ($250,000) = $200,000.
Step 3: Preliminary Casualty Loss = (Lesser of Adjusted Basis or FMV Decline) ($200,000) – Insurance Reimbursement ($180,000) = $20,000.
Step 4: Deductible Casualty Loss = Preliminary Casualty Loss ($20,000) – $500 floor = $19,500 loss.
Step 5: Cash Received = Insurance Reimbursement ($180,000) – Mortgage Amount ($150,000) = $30,000.
Example 2: Gain on Reimbursement with Postponement and Mortgage Escrow
Scenario: Mary’s home, with an adjusted basis of $150,000, is destroyed by a fire in a federally declared disaster area. The FMV before the fire was $200,000. She receives a $170,000 insurance reimbursement and has an outstanding mortgage of $120,000. Since the insurance reimbursement exceeds her Adjusted Basis or FMV Decline, she has a gain—and the $500 floor does not apply to gains. The lender holds $120,000 in escrow to satisfy the mortgage, and the excess funds are released to Mary as cash.
Step 1: Decrease in FMV = $200,000 – (FMV After, assumed $0) = $200,000.
Step 2: Lesser of Adjusted Basis or FMV Decline = the lesser of Adjusted Basis ($150,000) or Decline in FMV ($200,000) = $150,000.
Step 3: Gain = Insurance Reimbursement ($170,000) – Lesser of Lesser of Adjusted Basis or FMV Decline ($150,000) = $20,000.
Step 4: Cash Received = Insurance Reimbursement ($170,000) – Mortgage Amount ($120,000) = $50,000.
Step 5: Mary elects to postpone the gain by purchasing a replacement property within 4 years.
Example 3: Disaster Loss with Election to Deduct and Mortgage Escrow
Scenario: Tom’s home is destroyed in a federally declared disaster in January 2025. His adjusted basis was $250,000, and he receives a $200,000 insurance reimbursement. Tom has an outstanding mortgage of $180,000. The lender holds the reimbursement in escrow to pay off the mortgage, and any excess funds are later released.
Step 1: Decrease in FMV results in an Adjusted Basis or FMV Decline of $250,000.
Step 2: Lesser of Adjusted Basis or FMV Decline = the lesser of Adjusted Basis ($250,000) or Decline in FMV (assumed $250,000) = $250,000.
Step 3: Preliminary Casualty Loss = (Lesser of Adjusted Basis or FMV Decline) ($250,000) – Insurance Reimbursement ($200,000) = $50,000.
Step 4: Deductible Casualty Loss = Preliminary Casualty Loss ($50,000) – $500 floor = $49,500 loss.
Step 5: Cash Received = Insurance Reimbursement ($200,000) – Mortgage Amount ($180,000) = $20,000.
Step 6: Tom reports the deductible loss on the appropriate forms and may elect to deduct the loss in the preceding tax year.
Example 4: Demolition Order, Gain Calculation, and Mortgage Escrow
Scenario: Due to a wildfire in a federally declared disaster area, Karen is ordered to demolish her unsafe home. Her adjusted basis is $400,000, and the FMV before the fire was $600,000. After the wildfire, the FMV is considered $0. Karen receives $500,000 in insurance compensation and has a mortgage of $350,000. Since the insurance exceeds her Adjusted Basis or FMV Decline, this results in a gain (and the $500 floor does not apply to gains). The lender holds $350,000 in escrow to satisfy the mortgage, with any remaining funds released to Karen.
Step 1: Decrease in FMV = $600,000 – $0 = $600,000.
Step 2: Lesser of Adjusted Basis or FMV Decline = the lesser of Adjusted Basis ($400,000) or Decline in FMV ($600,000) = $400,000.
Step 3: Gain = Insurance Compensation ($500,000) – Lesser of Adjusted Basis or FMV Decline ($400,000) = $100,000.
Step 4: Cash Received = Insurance Compensation ($500,000) – Mortgage Amount ($350,000) = $150,000.
Note: Although Karen shows a gain for tax purposes, the actual cash available to her is the excess of the insurance proceeds after satisfying the mortgage.