Is a casualty gain taxable?

How a gain arises

A casualty usually creates a loss, so a gain surprises people. The publication’s formula is simple: the amount you receive minus your adjusted basis. The amount you receive includes cash plus the value of any property you get, less expenses of obtaining the reimbursement, and it includes insurance paid directly to a mortgage lender. In the publication’s example, a hurricane destroys a home and the insurer awards $145,000, of which $140,000 goes to you and $5,000 straight to the mortgage holder; the full $145,000 is the amount received. Replacement-value policies and long-held property with a low basis are the common triggers. Basis, not market value, is the yardstick, so an old house bought cheaply can produce a large gain even if its value fell more than its basis.

Postponing the gain

You do not report the gain if the reimbursement itself comes as similar property. If you are paid in money, you can choose to postpone the gain by buying property similar or related in service or use within the replacement period. To postpone all of it, the replacement must cost at least as much as the reimbursement; if it costs less, you include the gain up to the amount you did not spend. The publication’s example: a cottage bought for $18,000 in 1970 is destroyed, insurance pays $146,000, so the gain is $128,000. You spend $144,000 rebuilding, which is $2,000 less than you received, so $2,000 is taxable now and the rest is postponed. Postponed gain reduces the basis of the replacement: a $67,000 payout on a rental with a $62,000 basis is a $5,000 gain, and a $110,000 replacement rental has a basis of $105,000.

Replacement must be bought for the purpose of replacing the property, gifts and inheritances do not count, and you cannot postpone if you buy from a related person in the situations the publication lists. For an owner-user the replacement must work the same way, so a home replaced by a grocery store fails. The calculator applies these arithmetic rules; the timing is covered in how long you have to replace the property.

Your main home destroyed

If the gain comes from a main home, you can generally exclude it as if you had sold the home, up to $250,000, or $500,000 if married filing jointly, if you owned and lived in it as your main home for at least two of the five years ending on the date of destruction. The exclusion is applied first. Only if the gain is bigger than the exclusion do you look at postponement, and then the replacement home must cost at least the amount you received minus the excluded gain to postpone everything. Our home sale exclusion calculator covers the exclusion in more depth. In a federally declared disaster area there are extra rules: no gain is recognized on insurance paid for unscheduled personal property in the home, and the replacement period is longer.

A worked example with the calculator

Suppose a fire destroys a rental cottage with an adjusted basis of $62,000 and the insurer pays $67,000. The gain is $5,000. If you build a replacement rental for $110,000 inside the replacement period, you reinvested more than you received, so nothing is reported now, the whole $5,000 is postponed, and the new building’s basis is $105,000 ($110,000 minus $5,000). If you spent only $64,000, the unspent $3,000 of reimbursement would be taxable now and $2,000 postponed. Enter the amounts above, leave the main home box off for a rental, and the calculator shows the same split.

How and where it is reported

A gain on personal-use property goes on Form 4684 and Schedule D; postponed gain is not reported on these forms. If you have both gains and losses from casualties, compare them after reducing each loss by reimbursement and $100 and before the 10% reduction. If gains exceed losses, the net is a capital gain with no 10% rule; the publication’s example has a $600 loss and a $1,600 gain producing a $1,000 net gain. Gain on depreciable business property can include ordinary income from depreciation recapture, covered in our depreciation recapture calculator. If you deducted a loss in an earlier year and later receive more reimbursement than expected, the extra is income only to the extent the deduction reduced your tax.

Sources

• IRS Publication 547, Casualties, Disasters, and Thefts (2025): Figuring a Gain; Postponement of Gain; Main home destroyed. 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.