How does insurance reimbursement affect a casualty loss?

Subtract what you get, or expect to get

The core instruction is short: if you receive insurance or other reimbursement you must subtract it when you figure your loss. It goes further than cash in hand. If a claim exists with a reasonable prospect of recovery, the loss is not sustained until you know with reasonable certainty whether you will be reimbursed, and you must reduce your loss by the expected reimbursement even if payment comes in a later year. That is why a destroyed car with a pending claim produces no loss in the year of the accident.

You are also expected to file the claim. If you have coverage and skip the claim, you cannot deduct the full unrecovered amount, only the part your policy would not have covered anyway. The publication’s example is comprehensive coverage with a $1,000 deductible: the first $1,000 of storm damage is deductible, subject to the $100 and 10% rules, even if you never claim, because the policy would not have paid it.

What reduces the loss and what does not

Employer emergency disaster fund money reduces the loss, but only the amount you actually used to rehabilitate or replace the damaged property. In the publication’s example a tornado leaves a $10,000 loss after insurance, and $4,000 from the employer fund is spent on repairs, so the loss before limits is $6,000. Excludable cash gifts from relatives and neighbors with no restrictions on use do not reduce it, even if you spend them on repairs. Loan proceeds you use to repair or replace do not reduce it. Food, medical supplies and other assistance do not reduce the loss unless they replace lost or destroyed property. Federal disaster loan cancellation does reduce it, and Stafford Act relief grants that specifically reimburse a loss do too. Disaster unemployment assistance is taxable unemployment benefits.

When the later payment is different

If you deducted a loss using an expected reimbursement, the actual payment can differ. If you get less than you expected, you claim the shortfall as a loss, with your other losses, in the year you can reasonably expect no more reimbursement. If you receive exactly what you expected, nothing changes. In the publication’s flood example a $950 car repair has a $100 deductible; the owner expected the $850 insurance reimbursement, had no deduction in 2025 and receives the $850 in 2026 without reporting income. If you receive more than expected after you claimed a deduction, include the extra in income in the year you receive it, but only to the extent the earlier deduction reduced your tax; you do not refigure the earlier year. And if you never deducted the loss, none of the reimbursement is income. The publication’s boat example: no itemizing in 2024, so a full reimbursement was not income.

Living-expense payments

When you cannot use your main home because of a casualty, or authorities do not allow access, insurance payments for living expenses do not reduce the casualty loss. They are income only to the extent they exceed the temporary increase in your living expenses, and none of it is taxable if the casualty occurs in a federally declared disaster area. Compute the increase as actual expenses (rent, transportation, food, utilities, miscellaneous services) minus the normal expenses you would have had. The publication’s example: a hurricane sends someone to a motel for a month; normal rent was $1,400 and food $500 ($1,900), motel rent was $3,000 and food $850 ($3,850), so the increase is $1,950. The insurer paid $2,200, so $250 is income, reported on Schedule 1, line 8z. Fill in the optional living-expense boxes above to run it.

Putting the pieces together

Work in this order: find the loss before reimbursement as the smaller of basis or value drop, subtract insurance, subtract any employer fund money you spent on repairs, and only then apply the $100 and 10% rules for personal-use property. The deductible you pay yourself stays in the loss, which is why a $750 collision deductible produces a $650 loss after the $100 rule in the publication’s example. Keep the insurer’s settlement letter, since it decides whether a later difference is a further loss or income.

When reimbursement exceeds basis

If total reimbursement is more than your adjusted basis, you have a gain instead of a loss; see whether a casualty gain is taxable. For the other half of the calculation, see how to figure the loss, and for a home, storm damage rules.

Sources

• IRS Publication 547, Casualties, Disasters, and Thefts (2025): Insurance and Other Reimbursements; Reimbursement Received After Deducting Loss. Read November 2, 2026.

Edition read: Publication 547 (2025), for use in preparing 2025 returns. Dollar limits and dates on this page are the figures printed in that edition; legislation enacted after it was published is not reflected, so check the current publication, Form 4684 and its instructions for your tax year. This page summarizes the publication and does not replace it.