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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15601
Experience:  15years with H & R Block. Divisional leader, Instructor
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My client's home, built in 1995 at a cost of $1,100,000 burned

Customer Question

My client's home, built in 1995 at a cost of $1,100,000 burned to the ground in 2005, a total loss. The first mortgage lien holder was immediately paid $750,000 and only after lengthy litigation, my client received a $1,500,000 settlement from the insurance company - out of which $375,000 had to be paid to the lawyer handling the suit against the insurer. So he netted an additional $1,125,000 cash which when added to the $750,000 paid by the insurer to the lien hold = $1,875,000 which is an overall $775,000 gain. Query, will he owe federal income taxes on this gain?
Submitted: 2 years ago.
Category: Tax
Expert:  Robin D. replied 2 years ago.
Hello,Will your client be replacing the home? Or did they replace the home?If they did then the gain is not recognized. Generally, you must recognize the gain if you receive unlike property or money as reimbursement. But you generally can choose to postpone all or part of the gain if, within 2 years of the end of the first tax year in which any part of the gain is realized, you purchase property similar or related in service or use to the damaged, destroyed, or stolen property.So if they plan on replacing the home or have done so they do not have to report the gain. Their basis in the new would be the same as the basis in the home lost.
Expert:  Robin D. replied 2 years ago.
Please let me know if you need clarification.