I’d like to begin this article by passing along my heartfelt sympathies for all of those who’ve suffered damage to their homes, businesses and livelihoods through the recent (and ongoing) flood events in the upper North Island of New Zealand.
A number of US Global Tax’ staff have been affected and currently away from the office, alongside a much larger number of our clients.
Whilst taxation can seem like an afterthought at a time like this, it has indeed been on the minds of many of our clients who’ve suffered damage to their properties, eager to understand if they may face further costs as a result of home insurance claims.
As a reminder, US citizens are taxed on their worldwide income regardless of where in the world they reside. As a result, damage to property (or an insurance claim) in New Zealand may still require reporting to the IRS.
For those concerned, here is a brief explainer below. Please note, the below information is broad, and may not be applicable for all circumstances.
Broadly speaking, insurance claims are taxable income.
However, an actual tax liability being incurred on a home insurance claim is incredibly rare.
The reason for this, is due to the deductibility of damage to or destruction of your property as a result of natural disaster. The value of the damage is usually the same as the value of an insurance claim, therefore the deduction taken by a taxpayer will (more often than not) offset any tax on insurance.
The IRS previously suspended “casualty loss deductions” in most circumstances for losses incurred between 2018-2025, however losses are still deductible to the extent that taxable income is incurred from an insurance claim.
But, for those interested, here is a longer explanation.
The IRS allows a deduction for damage or destruction of personal property, caused by a “qualifying event”:
- An “act of God,” which includes floods, fires, earthquakes, landslides, storms, tsunamis, volcanic eruptions, and windstorms.
- Theft or vandalism, including burglaries, extortion, embezzlement, robbery etc.
- Accidents, riots, terrorist attacks
As mentioned above, as US citizens are required to file tax returns annually to the IRS regardless of where they reside, so whilst an insurance claim in NZ may be reportable to the IRS, a loss is also deducible.
When personal property is damaged or destroyed as a result of one of the above circumstances, we are able to deduct the loss from the taxpayers income on their tax return. We determine the loss in a similar way that an insurance claim would be calculated we use either:
- We take your adjusted basis (generally purchase price plus improvements) in the property before the damage and compare to the fair market value after the damage
- We take the fair market value of the property before the damage and compare to the fair market value after the damage
- The loss is the lesser of the two calculations above
For reference above, a destroyed property would usually have a new estimated value of $0.
We must then tally up these numbers from all of the various damaged assets, and calculate a total deductible loss.
This is where insurance comes into the equation
Now that we know the deductible loss for the tax return, we must add back any insurance pay-outs received. As insurance will rarely pay out more than the loss which has occurred, the loss tends to equal the value of the insurance pay-out.
In the instance that insurance pays out a value greater than the loss incurred, then this may need to be reported as taxable income.
But, for the most part, those who’ve received (or will receive) an insurance pay-out as a result of the North Island floods will likely have a deductible loss of equal value, and therefore no tax on the insurance claim.
For any questions, please feel free to contact US Global Tax on 093732949.