Oregon Tax Consultants Practice Exam

What happens to your basis if you receive an insurance reimbursement?

1. It increases due to reimbursement

2. It decreases due to reimbursement

3. It remains unchanged

4. Reimbursement is not considered

The correct answer is: It decreases due to reimbursement

When you receive an insurance reimbursement, your basis in the property is generally decreased. This is because the reimbursement amount is considered a recovery of your investment in the property. For example, if you suffer a loss and receive an insurance payout for that loss, this reimbursement effectively reduces your out-of-pocket investment or basis in that property. In tax terms, the basis is used to determine gain or loss when the property is sold. If you receive money back for a loss or damage, your basis is reduced by that amount. This reduction in basis ensures that you are not taxed on the same amount of money twice; first as part of your original investment and then again when you claim the reimbursement. This principle aligns with tax regulations that aim to accurately reflect the economic reality of your ownership and any recoveries you receive. Therefore, the answer highlighting that the basis decreases due to reimbursement is consistent with established tax practices and accurately reflects the effects of receiving such funds.