Today TaxMama hears from Shirley in Florida, who has this problem. “In 2002 a boat I’ve owned since 1986 ran aground.I had used it as a business to run charters. My insurance paid me $10,000 to have it towed to dry dock repairs. The depreciated value at the time of the accident was $3,000. Extensive repairs to get the boat back to running order cost about $90,000. The Insurance paid me $60,000. All payments and repairs took place in 2003. Now I am worried. Is there a capital gain due for either 2002 or 2003 or both years? Or can I “postpone” the gain since all the insurance money went to get the boat back to being operational?”
You clearly understand the concepts and the terminology. You should be in our EA Exam Review class this Saturday. This is the kind of stuff we’ll be talking about.
What you’ve got there, in tax terms, a casualty.
IRS has a Publication 547 that deals with your situation. In the section on reporting the gain, IRS talks about postponement of the gain. So, let’s look at how this applies to your situation, OK?
Let’s disregard the insurance payment to tow it your boat to drydock. You probably spent at least that much. So you’re even, there.
Your tax basis in the boat was $ 3,000
You spent on repairs $90,000
The insurance company paid ( 60,000)
Your new basis is $33,000
So, although the insurance company paid you much more than your basis, since you did use all that money – AND MORE to put the boat back into operation, you don’t have a gain at all.
What you do have, is a net $30,000 increase in the basis of the boat – which you can depreciate from the time you put the boat back into service. So, you’re just fine!
And remember, you can find answers to questions about disasters and all kinds of other tax issues, free. Where? Where else? At TaxMama.com
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- IRS Publication 547 :: Casualty Losses, Disasters and Involuntary Conversions