I'm a musician and had some equipment stolen and received an insurance settlement for it. I understand that I don't have to claim the money from the settlement on my taxes since the amount was less than the value of the stolen equipment. I purchased replacement equipment with the settlement money. Can I claim a section 179 deduction on the new equipment even though I paid for it with the insurance money? I received a settlement of $5,000 and spent roughly $5,500 on the replacement equipment.

ANSWER

The BIDaWIZ Team's Answer:

That's correct, you do not have an involuntary gain since the basis of the stolen property is in excess of the insurance proceeds received. However, the adjusted basis in the property is the replacement cost less the insurance proceeds received. Thus, if you received $5,000 from the insurance company and used $5,500 for replacement property, then your adjusted basis is $500. This means you can only claim the Section 179 election for the $500 as that is the adjusted basis of the new property. This is referenced in IRC Section 1033.