Fred Hubler’s article explains that when rental property owners lose property to a natural disaster, the insurance payout they receive can trigger a taxable event, potentially resulting in upward of 30% owed in capital gains taxes, a reality that property owners hit by Hurricane Helene and the Los Angeles wildfires are experiencing firsthand.
He cites estimates from Milliman and CoreLogic putting insured losses between $4 billion and $6 billion from Helene, and $25 billion to $45 billion from the Los Angeles wildfires in early January.
Hubler explains that a little-known IRS rule called the 1033 exchange allows owners who lost rental property to natural disasters to defer capital gains taxes by reinvesting insurance proceeds into another property or a professionally managed real estate portfolio. He notes that the IRS treats the insurance payout as a sale of the property, and if the payment exceeds the property’s adjusted cost basis from depreciation, it creates a capital gain that the 1033 exchange can help defer.
The upshot: disaster victims don’t have to face a tax bill on top of a devastating loss – there’s a lesser-known IRS provision built for exactly this situation.
Catch the rest on Forbes: Disaster Recovery For Property Owners After Fires, Floods And Storms.