Condo Insurance Claim Settled; What are the Tax Implications?

R.G. from New Haven County writes:

Dear Mister Condo,

Our condo incurred damage in 2005 and filed an insurance claim, which resulted in a dispute and protracted litigation.  When the claim was finally settled, the Association distributed most of the proceeds to the owners in cash payment, while retaining 20% to increase the reserve account.  What is the tax treatment of the distribution on the owners’ individual tax returns?

Mister Condo replies:

R.G., I am glad that your insurance issue was finally settled. It is amazing how long and drawn out the claim and payment process can be. Since your question is of a tax nature, I reached out to my friend Sam Tomasetti, CPA of Tomasetti, Kulas & Company, P.C. for his opinion. Sam indicated that your best advice is to speak with your individual tax advisor as there are too many factors that go into the determination of what’s best for you as an individual owner. Here’s what he had to say:

“This question has too many possible answers for a quick answer. This can be a complicated situation, and one that you really should work directly with your tax advisor on. It is quite possible that all you have is a non-taxable basis reduction in your individual home investment, but as I say, this is a question that needs a more refined approach is allowed for via the “Ask Mister Condo” website.”

That makes sense to me, R.G.. Good luck!