Are Homeowners Insurance Payouts Taxable?

 

When receiving homeowners insurance payouts after an insurance claim has been settled, sometimes our Greensboro area clients question whether or not those payouts are taxable.  The answer is generally "no," insurance payouts are not taxable, with a few exceptions.

Not For Profit

Insurance is designed, as is said in the industry,  to "make you whole."  This simply means that an insurance payout on your homeowners policy is meant to put you back where you were before suffering the loss for which your claim has been made.  Homeowners insurance is not intended to compensate you for any more than you had before your loss was experienced and your claim was made and paid.  In fact, for a risk to be considered insurable, the opportunity for loss must be present but the opportunity for financial gain must be absent.

Taxable Homeowners Insurance Payouts

An exception to the non-taxability of homeowners insurance payouts relates to homeowners suffering a loss who decide to do the necessary repairs themselves.  The question of whether or not you're allowed to do your own repair work is basically up to your insurer.  They may be more likely to allow this for a relatively simple job that doesn't require some specialized skill such as that for plumbing, electrical or re-roofing work.

A few caveats regarding doing your own repairs for an insurance claim:

• You may not save much money by doing your own work on an insurance claim
• You may need to be licensed to carry out certain work such as plumbing or electrical
• Work that doesn't turn out as planned may face additional costs that your insurer won't cover
• If you're carrying a mortgage on your home, your mortgage lender likely has a say in who performs the repair work on your home.
• Your insurer will likely inspect and value the damage for which you're submitting a claim.  Once this is done, get an estimate from a professional contractor who may spot damage not obvious to you.  Get them to provide a professional estimate for repairs, which you can use when negotiating with your insurer for your final payout.

Labor Costs May Be Taxable

Once your insurance payout has been made, any amount over and above the cost of material for the repairs may be considered labor, which was provided by you.  In the eyes of the IRS, this money may be seen as taxable income to you.