Money from flood insurance reported as income?

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do I have to report this money as income?

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I used a Chalmatian accountant who didn't think so; I got called by an auditor who did. It was an expensive mistake.

It is income unless you spend it all on the damage.

Go load up on Visa prepaid cards for possible future repairs due to the flood.

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I don't get how it could be

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Insurance is supposed to make you whole. Not benefit from it... make you whole. In most cases, it doesn't even do that.

1) If you do a lot of the work yourself, you could end up with money left over. That money is not being put back into the property, you are more than whole... so you owe money on the difference.

2)

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So if you lost value, and said money is given to replace value, then you break even

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For their to be money left over, either #1 applies, or, you got more money than lost value. This is rare, but not impossible, and the only time I've ever seen it "in real life" is flood claims.

If more than 50% of your home is damaged from flood, it is treated as a total loss. So, the total rec'd could easily be more than the amount of damage. In addition, flood claims can be at replacement value, so that can bring more money into the pot.

To avoid taxes, just put the money back into the house. Get nicer stuff, whatever.

But the reality of it is, you could get an insurance check for having high end stuff, then you decide I'll replace it with low end crap. The net worth of your home would be less, but the total value to you is the same. Just that now, some of it is cash, instead of equity. I can see how that is an issue when carrying a mortgage and a 3rd party interest in the value of your home. But between you and an insurer, it shouldn't be about what you what you actually paid, it's about what it's worth. Like you said, the point of insurance is to make you whole. The point of income tax is to tax you on income. I can maybe even see the insurance agency having an issue, but to the tax man, the insurance company made you whole financially. Therefore, net zero.

Again, I know that's not how it works. It's just off to me.