We were Sandy victims and recently received our insurance check. We have a mortgage so I will be sending the check to them after endorsing it. The lender will then dole out the money in chunks as work progresses and do a final inspection when it is finished. What happens if we come in under budget?There may not be any left over but there could be if we do most of the work ourselves. The lender can’t keep the money, right? If they give us the balance is it taxable income? Does the insurance company report the payout to the IRS? I’ve heard at least one lender demands that every item on the initial adjuster’s report must be completed. In our case we don’t see a need to re-grout the powder room floor tile, although that’s an item on the report. Its fine and we could use that money for something else. Like the new boiler that was WAY more than allotted.
I can’t speak to what your lender does, so you’ll want to check with them.
In terms of the general tax issues: the payout from insurance is taxable only to the degree that it exceeds your basis (cost) in the asset and to the extent that it is not used to buy replacement property (which will defer the gain).
It shouldn’t be a problem (from a tax perspective) to spend the money on different parts of the house than the insurance company estimated, but you’ll want to talk to the insurer about how they feel about that.
Generally, the insurance payment is not reported to the IRS the way wages or interest are, so it’s up to you to report any loss or overpayment. The IRS has 3 years to audit you for any reason, 6 years if you misstated income by at least 25% and an unlimited amount of time if they argue that tax fraud was involved. So… it could catch up to you in an audit.