If I owe $100,000 on a house that’s insured for $200,000 and it burns down in a fire, do I have to pay capital gains on it?
That depends on the total value of the house. If you have $100,000 in equity then you wouldn’t realize any gain, since you lost a $200,000 house.
If you receive insurance proceeds for more than the replacement cost of the house, the difference may be considered a taxable gain. It can get complicated, though.
Just make sure you hire a qualified arsonist.
CPA here.
Insurance proceeds paid out for Homeowners insurance are generally not taxable. The effect they would have on your federal tax return would be to reduce any casualty loss you may be eligible to claim and it would also reduce your cost basis in your home if it was not a total loss and you sold the home in the future. (the 500,000/250,000 exclusion for sale of your main home would still apply).
If you were depreciating the home for any business use such as for an office in home, the insurance proceeds would also affect the basis for depreciation, once again if it was not a total loss.
For a home that burns to the ground in your scenario, after paying off the lien holder, the remaining insurance proceeds to you are not federally taxable.
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I just want to emphasize that what the mortgage on a house is entirely unrelated to the gains. You can buy a house at 50k in 1980, refinance it for 400k in 2007 and then sell it for 250k in 2010. You might think there’s $150k of loss but the IRS sees $200k of gain because you sold it for more than you paid for it. The mortgage doesn’t factor into the gain.
Also, gains on casualty losses and insurance reimbursements can generally be deferred by purchasing replacement property. So if you use the insurance proceeds to rebuild, you’re generally good.
Your mortgage is not relevant. What you paid for the house is relevant. Insurance proceeds are just like a partial sale of the real estate. It’s a partial sale because you still have the land, so unless the insurance proceeds exceed the purchase price, there’s no tax due. The tax proceeds reduce the “basis” of the real estate. Example: You paid $300k for the house and it’s insured for $200k. After the payout, your “basis” for the land is now $100k. If you now sell the land, whether you have a gain or a loss depends on whether the sales price is more or less than $100k.