Taxation For Insurance Claims Kept Instead Of Used To Repair Property

[Bryan Hancock]

So...if one receives a large insurance claim and decides to pocket it initially to pay off a mortgage and later does the property repairs what are the tax consequences? Using the dollars to pay off the mortgage initially will improve cash flow and then the excess cash flow could be used to make the needed repairs over time.

Does this become ordinary income? Thoughts? Ideas? Is there a way to avoid some taxes if the intent is to defer repairs?

[Mickey Harrison]

During Katrina I lost a property due to flooding. I asked the bank to write me a letter saying they wanted the insurance money to pay off the remainder of the loan before any repairs could be made (since they had interest in the property). I kept what was left and they started repairs with that when i thought the time was right. According to my tax person it was not considered income because there was no profit. IE. House had value 100k loss in storm , Insurance recovers the loss 100k, but you still owe money 60k. left overs are yours from your loss. 40k was not a profit but making me whole for my loss. Therefore not a taxable event..according to the person that was doing my taxes at the time.