Were you or your loved ones impacted by the Los Angeles fires? As residents deal with the aftermath, there is some tax relief available through the federal and California casualty loss rules. The tax consequences associated with the lost property depend on whether the property was insured, or if the loss is compensated otherwise (e.g. by government support).

If the property was insured, the extent and type of the coverage impact the amount of insurance compensation. This is an important factor in the tax and financial planning analysis.

If your house was lost to fire and was insured, you’ll be entitled to compensation. If the insurance proceeds exceed your adjusted basis in the property, you may have a capital gain. This could happen if your home appreciated in value since you purchased it and the insurance proceeds exceeded the so-called adjusted basis in the property. In short, the adjusted basis equals the purchase cost increased by capital improvements, if any.

If you generated a capital gain, you may qualify for the Section 121 exclusion, which allows you to exclude $250,000 (Single or Married Filing Separate) or $500,000 (Married Filing Joint) of the gain. Section 121 of the Internal Revenue Code applies when certain ownership requirements are met.