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We will be receiving an insurance settlement by a company that had illegally dumped several hundred tons of dirt, possibly contaminated, on our property. The settlement is expected to be over $300,000. The property is currently 32 acres of undeveloped land that has been in the family for 50 years. It was recently gifted to me from my parents. I've read that the settlement would be taxable beyond the cost of it, but there really is no cost. What would be taxable? If the settlement money was used to build a house on the property, would it still be taxable? Is there anything that could be done to make it non-taxable?


Expert Carlton Melton's Answer:

The Internal Revenue Code states that an individual is allowed a deduction for casualty losses, which includes vandalism. A company illegally dumping, possibly contaminated, dirt on to your property qualifies as vandalism. As part of calculating the deduction you are required to determine the amount of the casualty loss that you suffered. This is done by determining your adjusted basis in the property before the casualty, and determining the decrease in fair market value of the property as a result of the casualty. Insurance reimbursements are subtracted from the smaller of these two amounts to determine your casualty loss.


If you receive an insurance reimbursement that is more than your adjusted basis in the property you have a gain. This gain is taxable to you. However, you are able to postpone reporting the gain if you spend the funds reimbursed to restore the property. The details of all the limits and calculations are outlined in IRS Publication 547.


In short, if your basis in the property is less than the settlement amount you are going to realize a gain on the insurance settlement. You will be able to postpone recognizing the gain if you use the settlement funds to restore the property. Any amount from the settlement in excess of what is spent to restore the property will then be recognized as taxable gain.

Carlton Melton, CPA


3 yrs experience

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