It may turn out that you have a gain, if your insurance reimbursement is more than your adjusted basis in the property. If the net result on Form 4684 is a gain, this amount is transferred to Schedule D, Capital Gains and Losses.
In addition to insurance payments, reimbursements include money and the value of any property your receive, including an amount to pay off a mortgage or other lien on the damaged, destroyed, or stolen property.
If your main home was destroyed, and you have a gain from the casualty, you can exclude the gain the same as if you had sold or exchanged your home. You can exclude up to $250,000 ($500,000 if married filing jointly). If the gain exceeds the exclusion amount, you may be able to postpone the remainder of the gain.
Postponement of Gain
If you received reimbursement for the casualty in the form of property similar to, or related in service and use to the property that was destroyed or stolen, you do not need to report any gain. Your basis in the property you receive is generally the same as your basis in the property that was replaced.
If you receive money or other property that is not similar, you may be able to postpone any gain you had on the casualty or theft if you purchase property similar to that which was destroyed or stolen within a specified replacement period. If you have a gain on property that was damaged, you can postpone the gain if you spend the reimbursement on restoring the property.
If you spend all the reimbursement on replacement property or on restoring damaged property, you can postpone the entire gain you may have had. If you spend less than the total reimbursement, you will have to report the unspent amount as a gain.
The replacement property must be purchased for the specific purpose of replacing the property that was destroyed or stolen. You do not necessarily have to use the same funds you received as reimbursement. You could use these funds for another purpose, and borrow money to replace the property and still qualify to postpone the gain.
You effectively postpone the gain by reducing the basis in the replacement property. Any gain you are postponing is subtracted from the cost of the replacement property, and you would therefore generally not owe any tax on this gain until you sell or dispose of the replacement property.
The replacement period starts on the date your property was damaged, destroyed, or stolen, and ends two years after the close of the first tax year in which any part of your gain is realized (generally the year in which you receive the insurance or other reimbursement).
If your loss was your main home and the casualty occurred in an area declared a disaster area by the President, the replacement period is extended to four years after the first tax year in which you realized any gain.