Insurance Payout >Purchase Price

[Buckeye]

My nephew's pickup truck was stolen in November, found after 10 weeks, and recently totaled by his insurance company. The vehicle appreciated by quite a bit over the 2 years he owned it (he purchased it pre-COVID) so the settlement should be more than what he paid for it.

Is the amount he receives over the purchase price of the vehicle (and any money he put into it) taxable? Or is the settlement just making him whole because that is now the cost of the truck that was stolen and totaled.

As far as I know, the truck he intends to purchase will not cost as much as the settlement as he needs to purchase tools that were stolen that were not insured.

I have googled the situation but I haven't found any discussions where someone is receiving a settlement greater than a vehicle's purchase price. This is likely a rare situation, although not so rare recently, especially if a nice used pickup truck is involved.

 

[pb4uski]

https://blog.carvana.com/2020/03/wh...ou will have to,considers this a capital gain.

When you sell a car for more than it is worth, you do have to pay taxes. Selling a car for more than you have invested in it is considered a capital gain. Thus, you have to pay capital gains tax on this transaction.

The amount of capital gains tax you will have to pay may vary depending on numerous variables, especially how much income you have from other sources. You do not have to pay this tax until you file your tax return for the year. See below for more information on how to report a capital gain from selling a car for a profit.

But... if your nephew is in the 0% capital gains tax bracket, which will depend on his other income, there may be no tax on the gain. The 0% capital gains tax bracket is up to $41,675 of taxable income for a single and $83,350 of taxable income for a married couple... which equates to $54,595 of total income for a single or $109,250 of total income for a married couple.

However, this source seems to suggest that insurance payments are not taxable and I don't think that the are reported to the IRS.

https://www.autoinsurance.org/are-a...u receive money for,taxable income by the IRS.

I guess I would not worry about it unless the insurer reports the payment to the IRS.

 

[Bamaman]

Any gain on the sale of the truck technically would be taxable, but insurance settlements on automobiles are not reported to the IRS. Realistically, nobody pays taxes on insurance settlements because losses are most often a financial drain. Like you said, he had tools stolen too. And sales taxes will be assessed on another vehicle because there's no trade.

Sounds as if the nephew's between a rock and a hard place with the insurance company. Used car prices are up dramatically, however insurance companies are looking at a Black Book or NADA guidebook to document what a "fair value" is to pay. I don't know right now how accurate a guidebook is on today's higher auto or truck prices.

I usually go to NADA and look at the Trade In Price and the Retail Price. Adding for mileage and options, halfway between the two prices is usually a fair price--not including sales taxes on the next vehicle.

Good luck.

 

[ncbill]

Doubt it's a gain...insurance settlement also would include the value of the tools (plus anything else claimable) stolen.

 

[Buckeye]

Doubt it's a gain...insurance settlement also would include the value of the tools (plus anything else claimable) stolen.

Apparently you have to claim stolen contents on a homeowners policy or a renter's policy. He has neither so there will be no money coming for tools. My car was robbed once (on an Air Force base, of all places) and I believe the contents that were stolen were not covered by my auto policy so his situation with his tools sounds familiar to me.

The truck he purchased about 3 years ago apparently now sells for $15-20k more than he bought it for. Like someone else said, I don't know what Kelly or Edmunds says but it's what the vehicles are being listed for for sale right now. It's totally nuts for late model used trucks!

 

[Buckeye]

https://blog.carvana.com/2020/03/wh...ou will have to,considers this a capital gain.



But... if your nephew is in the 0% capital gains tax bracket, which will depend on his other income, there may be no tax on the gain. The 0% capital gains tax bracket is up to $41,675 of taxable income for a single and $83,350 of taxable income for a married couple... which equates to $54,595 of total income for a single or $109,250 of total income for a married couple.

However, this source seems to suggest that insurance payments are not taxable and I don't think that the are reported to the IRS.

https://www.autoinsurance.org/are-a...u receive money for,taxable income by the IRS.

I guess I would not worry about it unless the insurer reports the payment to the IRS.

Well, is being 'reimbursed' by the insurance company for an amount greater than the purchase price equivalent to a sale with capital gains? I agree with what you said on the sale of a vehicle but I'm not sure receiving an insurance settlement falls into the same category. But what do I know!

Do insurance companies 1099 you like title companies do when you sell a house?

 

[Buckeye]

Any gain on the sale of the truck technically would be taxable, but insurance settlements on automobiles are not reported to the IRS. Realistically, nobody pays taxes on insurance settlements because losses are most often a financial drain. Like you said, he had tools stolen too. And sales taxes will be assessed on another vehicle because there's no trade.

Sounds as if the nephew's between a rock and a hard place with the insurance company. Used car prices are up dramatically, however insurance companies are looking at a Black Book or NADA guidebook to document what a "fair value" is to pay. I don't know right now how accurate a guidebook is on today's higher auto or truck prices.

I usually go to NADA and look at the Trade In Price and the Retail Price. Adding for mileage and options, halfway between the two prices is usually a fair price--not including sales taxes on the next vehicle.

Good luck.

So, insurance companies don't 1099 you like title companies do when you sell a house? That would be good news. This whole fiasco has cost him an enormous amount of lost income. He lives in a state that requires insurance companies to include the tax and license costs for a replacement vehicle (which I guess is based off the settlement amount).