Eaton Fire Tax Scenarios: 10 People, 5 Situations, Real Math
1. OBBBA (July 2025) — Qualified Disaster Loss: Federal 10% AGI floor eliminated. $500 per-event floor. No itemizing required. California has NOT conformed — CA still uses 10% floor.
2. R&TC §17138.7 (SB 159, September 2025): California excludes qualified Edison wildfire settlement amounts through 2029. Every scenario involving an Edison payment now has a California tax result of $0 — regardless of federal treatment.
3. FDTRA 2026 Payment Cliff: Federal wildfire payment exclusion expired December 31, 2025. Scenarios assuming 2026 payments cannot rely on FDTRA — §104 and §1033 are the remaining federal tools.
Read each scenario below with these three updates in mind. A California column in every scenario would now show $0 California tax on qualifying Edison payments.
Read all 15 posts in this series → Every Eaton Fire tax issue mapped in one place — with the unique angle each post takes.
By Adam Libman, CRTP · California Registered Tax Preparer · 25 years in tax controversy
These numbers are devastating to you. To us, this is what we do every day.
We make the tax side of this emotionally manageable — so you can focus on rebuilding. One consult. Clear answers. No jargon.
Book an Eaton Fire Tax ConsultGain Client — Well-insured, insurance exceeds basis
Long-term owner. Insurance proceeds create a taxable gain after §121. No casualty loss available. The entire question is the §1033 election.
Underinsured with Loss — Insurance genuinely below basis
Recent buyer or high-improvement property. Insurance doesn't cover adjusted basis. A real casualty loss may exist — but the size of Edison's eventual payment determines whether filing early helps or hurts.
Underinsured with Hidden Gain — Feels underinsured, actually has a gain
The most misunderstood lane. Long-term owner with low basis. Insurance pays less than FMV — they feel cheated — but insurance still exceeds their adjusted basis. They have a gain, not a loss. Filing a casualty loss here is filing an incorrect return. This lane is more common than anyone is acknowledging, and I saw it again just this week.
Smoke Damage — Home still standing, partial loss
Property survived but sustained smoke and structural damage. Loss based on FMV decline, not reconstruction cost. Whether to file early depends heavily on how large the loss is relative to what Edison might pay.
Renter — No real property, contents loss only
No casualty loss available (TCJA). No timing question. The only lever is physical injury documentation in the Edison settlement negotiation.
Not sure which lane you're in? The answer starts with one number: your adjusted basis. If your insurance proceeds exceeded your basis, you're in Lane 1 or 3 — not Lane 2. Many people don't know their basis until we calculate it together.
Why hire Adam — not just read the blog:
✓ I stress-test your assumptions
✓ I file the return correctly
✓ I tell you which lane you're in
✓ I bridge tax & legal strategy
Audit representation included. I back up what I put in writing.
Book an Eaton Fire Tax ConsultI've been asked some version of "what should I do on my 2025 return?" dozens of times since January. The honest answer is that it depends entirely on which of five situations you're in — and on how big your loss is relative to what Edison might eventually pay.
But there's a sixth answer nobody wants to hear: some people have been told they're in Lane 2 (underinsured, real loss) when they're actually in Lane 3 — underinsured relative to what they expected, but with a taxable gain relative to their basis. I saw this exact situation again this week. It's more common than anyone is acknowledging, and filing a casualty loss in Lane 3 means filing an incorrect return.
Here are ten people. Same $300K wages, same California address, same Edison settlement year (2027). Five situations. Two people per situation. Every lane ends with a head-to-head comparison so the bottom line is impossible to miss.
New to the framework?
Assumptions
Tax rates (approximate): Federal marginal 24% at this income level. CA marginal 9.3%. Combined ordinary rate: 33.3%. Combined long-term capital gains rate: 24.3% (federal 15% + CA 9.3% — California taxes all capital gains as ordinary income). When pushed into a higher federal bracket by Edison income, the effective rate rises to ~35% federal.
California casualty loss floor: 10% AGI = $30,000 reduction to the CA deduction. Federal: no floor for qualified Eaton Fire disaster losses.
Edison amounts by lane: Lane 1 (Gain client) $500K · Lane 2 (Underinsured loss) $300K · Lane 3 (Hidden gain) $400K · Lane 4 (Smoke damage) $200K · Lane 5 (Renter) $150K. These reflect the realistic spread — a gain client with significant property damage receives more; a renter with no real property receives less.
Simplifications: AMT, NIIT, carryback elections, and installment arrangements are excluded. These numbers isolate the key decision variables.
Lane 1 — Gain Client
Insurance proceeds: $950K. Realized gain: $550K. §121 exclusion (MFJ primary residence): $500K. Taxable gain after §121: $50K.
Edison settlement (2027): $500K — allocated as $350K property damage · $80K physical injury (§104 excluded) · $70K ordinary income (interest $40K + emotional distress without physical injury $30K).
The decision: No casualty loss exists here — insurance exceeds basis. The entire question is whether to make the §1033 election to defer the gain while reinvesting. The two people make opposite choices.
Person A — Makes the §1033 Election
2025: Person A realizes the $50K taxable gain when insurance arrives but attaches a written §1033 election statement to the return, deferring the gain. Begins tracking replacement expenditures in a separate log. No tax on the conversion gain.
| 2025 | Federal | CA |
|---|---|---|
| Taxable gain after §121 | $50,000 | $50,000 |
| §1033 election — deferred | ($50,000) | ($50,000) |
| Net gain recognized | $0 | $0 |
2027 (Edison $500K): Total property proceeds: $950K insurance + $350K Edison = $1,300K. Basis $400K. §121 $500K. Total deferred gain: $400K. Person A is reinvesting in replacement property within the 4-year window — entire $400K gain deferred. Only the $70K ordinary Edison components are taxable.
| 2027 | Amount | Character | Tax |
|---|---|---|---|
| Property gain | $400,000 | §1033 deferred | $0 |
| Edison ordinary components | $70,000 | Ordinary | $23,310 |
| Total tax from fire (2025 + 2027 combined) | $23,310 | ||
Person B — Does NOT Make the §1033 Election
2025: Same facts, but Person B's preparer doesn't attach the §1033 election statement. The $50K taxable gain is recognized and taxed in 2025.
| 2025 | Amount | Tax |
|---|---|---|
| Gain recognized (no election) | $50,000 | $12,150 |
| 2025 extra tax | $12,150 |
2027 (Edison $500K): Without the §1033 election, the $400K deferred gain that would have been protected is fully taxable. Person B owes capital gains on the entire amount.
| 2027 | Amount | Character | Tax |
|---|---|---|---|
| Property gain — no §1033 protection | $400,000 | Capital gain | $97,200 |
| Edison ordinary components | $70,000 | Ordinary | $23,310 |
| Total tax from fire (2025 + 2027 combined) | $132,660 | ||
Makes §1033 election
No §1033 election
Lane 2 — Underinsured Owner
Person C — large loss: Insurance $400K → apparent gap before Edison: $400K.
Person D — small loss: Insurance $650K → apparent gap before Edison: $150K.
Edison settlement (2027): $300K for both — allocated as $220K property damage · $40K physical injury (§104 excluded) · $40K ordinary income (interest $20K + emotional distress without physical injury $20K).
The decision: Person C files the apparent $400K loss in 2025. Person D waits.
Person C — Large Loss ($400K gap) · Files in 2025
2025: Insurance $400K against $800K basis = $400K apparent loss. Person C claims the full amount. The entire $300K in wages is wiped out, creating a $100K NOL carryforward. Note: filing in 2025 assumes the portion claimed was not subject to a reasonable prospect of recovery from Edison — a standard that matters under §165 and that practitioners apply differently in open-claim situations. The position is common in wildfire practice but not automatic.
| 2025 | Federal | CA |
|---|---|---|
| Wages | $300,000 | $300,000 |
| §165 loss claimed | ($400,000) | ($370,000) after floor |
| Net taxable income | ($100,000) NOL | ($70,000) NOL |
| Refund received | ~$72,000 | ~$27,900 |
Total 2025 refund: ~$99,900. NOL carryforward: $100K federal · $70K CA.
2027 (Edison $300K): The §111 trap activates. Person C's prior loss produced a tax benefit on the full $300K of wages. To the extent that prior deduction produced a tax benefit, Edison's $220K property payment is ordinary income — not capital gain. The NOL carryforward partially cushions this but doesn't change the character.
| 2027 | Amount | Rate | Tax |
|---|---|---|---|
| Edison property — §111 recapture (ordinary) | $220,000 | — | ordinary rate |
| Edison ordinary components | $40,000 | — | ordinary rate |
| NOL carryforward applied | ($100,000) | — | — |
| Net new taxable income (on top of $300K wages) | $160,000 | ~35% fed pushed into higher bracket | |
| Extra 2027 tax (federal ~$56K + CA ~$21.5K) | ~$77,470 | ||
Person D — Small Loss ($150K gap) · Waits for Settlement
2025: Insurance $650K against $800K basis = $150K apparent loss. Person D files an open transaction disclosure, makes a protective §1033 election statement, and waits. No loss claimed while Edison is open.
2027 (Edison $300K): Total property proceeds: $650K insurance + $220K Edison property = $870K. Basis $800K. Total property recovery now exceeds basis by $70K — Person D actually has a gain, not a loss. The §1033 election defers that $70K gain if reinvesting. Only the $40K in ordinary Edison components is taxable now.
| 2027 | Amount | Character | Tax |
|---|---|---|---|
| Net property gain | $70,000 | §1033 deferred (if reinvesting) | $0 |
| Edison ordinary components | $40,000 | Ordinary | $13,320 |
| Total tax from fire (2025 + 2027 combined) | $13,320 | ||
Large loss · Filed early
Small loss · Waited
Lane 2 contains a dangerous trap: a $150K apparent loss at filing time can become a $70K gain after Edison settles. Anyone who filed that apparent loss early now faces §111 recapture on income that turned out not to be a real loss. The only way to avoid this is to wait — or to accept that the refund comes with strings.
Lane 3 — Underinsured with Hidden Gain ⚠️
The situation: Long-term owner with low basis. Home purchased 1998 for $280K, improvements $70K = adjusted basis $350K. Home FMV before fire: $1,400,000. FAIR Plan insurance: $700K.
They feel cheated — they got $700K on a $1.4M home and can't come close to rebuilding. They feel underinsured. And they are — relative to replacement cost. But "underinsured" is not a tax concept. The tax code only cares about one thing: did your proceeds exceed your adjusted basis? $700K insurance against $350K basis = $350K gain. §121 exclusion (MFJ): $500K — eliminates the entire gain. Net taxable on insurance: $0.
They have a gain, not a loss. Filing a casualty loss here is very likely incorrect — unless adjusted basis has been carefully verified to include all improvements, correct land/structure allocation, and any prior basis adjustments. Basis errors go in both directions. The point is: calculate before claiming.
Edison settlement (2027): $400K — allocated as $300K property damage · $50K physical injury (§104 excluded) · $50K ordinary income (interest $30K + emotional distress without physical injury $20K).
Person E — correctly identifies the gain, makes §1033 election, plans for Edison.
Person F — incorrectly claimed a casualty loss on the 2025 return (or missed the §1033 election entirely).
Person E — Correctly Identifies Gain · Makes §1033 Election
2025: Person E's preparer calculates the actual position: insurance $700K minus adjusted basis $350K = $350K gain. §121 covers the full $350K. Net taxable gain: $0. §1033 election attached to the return — written statement of intent to reinvest. No extra tax in 2025.
| 2025 | Federal | CA |
|---|---|---|
| Insurance gain after §121 | $0 taxable | $0 taxable |
| §1033 election filed | ✓ Gain deferred | ✓ Gain deferred |
| 2025 extra tax from fire | $0 | $0 |
2027 (Edison $400K): Edison's $300K property payment arrives. Total property proceeds: $700K insurance + $300K Edison = $1,000K. Basis $350K. §121 $500K. Total gain: $1,000K − $350K − $500K = $150K taxable gain. Person E's §1033 election covers this — entire $150K deferred while reinvesting in replacement property. Only the $50K ordinary Edison components are taxable.
| 2027 | Amount | Character | Tax |
|---|---|---|---|
| Total property gain after §121 | $150,000 | §1033 deferred (reinvesting) | $0 |
| Edison ordinary components | $50,000 | Ordinary | $16,650 |
| Total tax from fire (2025 + 2027 combined) | $16,650 | ||
Person F — Filed an Incorrect Casualty Loss in 2025
The mistake: Person F's preparer looked at "what the home was worth" vs. "what insurance paid" — $1,400K FMV minus $700K insurance = $700K "loss." That calculation is wrong. Casualty loss is computed as the lesser of adjusted basis or decline in FMV, minus insurance received. When insurance exceeds adjusted basis, there is no loss — there's a gain. But the incorrect $400K casualty loss was filed anyway.
2025 (incorrect return):
| 2025 | Federal | CA |
|---|---|---|
| Wages | $300,000 | $300,000 |
| Incorrect §165 loss claimed | ($400,000) | ($370,000) |
| Net taxable income | ($100,000) NOL | ($70,000) NOL |
| Refund received on incorrect return | ~$72,000 | ~$27,900 |
Total 2025 refund: ~$99,900 — but on an incorrect return. NOL carryforward: $100K federal · $70K CA.
2027 (Edison $400K): Edison's $300K property payment arrives. §111 recapture activates — but this time the prior deduction was incorrect. The IRS doesn't care. The refund created a tax benefit, and the recovery triggers ordinary income. All $300K of Edison property income is ordinary. The $50K in ordinary components adds on top. NOL carryforward partially cushions.
| 2027 | Amount | Character | Tax |
|---|---|---|---|
| Edison property — §111 recapture (ordinary) | $300,000 | Ordinary income | — |
| Edison ordinary components | $50,000 | Ordinary | — |
| NOL carryforward applied | ($100,000) | — | — |
| Net new taxable income (on top of $300K wages) | $250,000 | ~35% fed, pushed higher | |
| Extra 2027 tax (~$87.5K fed + CA) | ~$113,000 | ||
Correct analysis · §1033 election
Incorrect loss filed · No election
Lane 3 is the lane nobody talks about because it requires admitting a hard truth: "underinsured" relative to what you expected is not the same as having a tax loss. The tax code doesn't care what your home was worth or what it costs to rebuild. It cares about your adjusted basis. Long-term owners with low basis almost always have gains — even when their insurance felt inadequate.
If you bought before 2010 and feel underinsured, get your basis calculated before you file →
Lane 4 — Smoke Damage, Standing Home
Person G — large FMV decline: FMV before $1,200K → after $700K. Decline: $500K (limited to $500K). Insurance remediation: $100K. Net loss before Edison: $400K.
Person H — small FMV decline: FMV before $1,200K → after $1,000K. Decline: $200K. Insurance: $80K. Net loss before Edison: $120K.
Edison settlement (2027): $200K for both — allocated as $130K property/smoke damage · $40K physical injury (§104 excluded) · $30K ordinary income (interest + emotional distress without physical injury).
The decision: Person G files the $400K loss in 2025. Person H waits.
Person G — Large Loss ($400K net) · Files in 2025
2025: FMV decline $500K, insurance $100K, net loss $400K. Person G files the full amount. Same caveat as Lane 2: filing in 2025 assumes the claimed portion was not subject to a reasonable prospect of Edison recovery — a standard that is commonly applied in wildfire practice but worth documenting in the file.
| 2025 | Federal | CA |
|---|---|---|
| Wages | $300,000 | $300,000 |
| §165 loss claimed | ($400,000) | ($370,000) after floor |
| Net taxable income | ($100,000) NOL | ($70,000) NOL |
| Refund received | ~$72,000 | ~$27,900 |
Total 2025 refund: ~$99,900. NOL carryforward: $100K federal · $70K CA.
2027 (Edison $200K): Edison's $130K property payment triggers §111 recapture — all $130K is ordinary income since it's less than the prior $400K deduction. The $30K ordinary Edison components add on. NOL carryforward cushions the blow but the character damage stands.
| 2027 | Amount | Character | Tax |
|---|---|---|---|
| Edison property — §111 recapture | $130,000 | Ordinary | ordinary rate |
| Edison ordinary components | $30,000 | Ordinary | ordinary rate |
| NOL carryforward applied | ($100,000) | — | — |
| Net new taxable income | $60,000 | ~35% fed (higher bracket) | |
| Extra 2027 tax (~$21K fed + ~$10.2K CA) | ~$31,170 | ||
Person H — Small Loss ($120K net) · Waits for Settlement
2025: FMV decline $200K, insurance $80K, net loss $120K. Person H waits, filing an open transaction disclosure only.
2027 (Edison $200K): Total property recovery: $80K insurance + $130K Edison property = $210K. The FMV decline was $200K — recovery exceeds the loss. No net casualty loss to claim. The $10K excess reduces Person H's basis in the home. Only the $30K ordinary Edison components are taxable.
| 2027 | Amount | Character | Tax |
|---|---|---|---|
| Casualty loss (recovery exceeds decline) | — | No deduction | $0 |
| Basis reduction (excess recovery $10K) | $10,000 | Future cost on sale | ~$2,430 eventual |
| Edison ordinary components | $30,000 | Ordinary | $9,990 |
| Total tax from fire (2025 + 2027 combined) | $9,990 | ||
Large loss · Filed early
Small loss · Waited
Lane 5 — Renter
Person I — large contents loss: Contents basis $400K. Insurance paid $350K — below basis, not taxable.
Person J — small contents loss: Contents basis $150K. Insurance paid $130K — below basis, not taxable.
Edison settlement (2027): $150K for both — allocated as $50K property/contents (below basis, not taxable) · $30K physical injury (§104 excluded) · $70K ordinary income (emotional distress without physical injury $40K + lost wages $20K + interest $10K).
The timing question: There is none. The TCJA eliminated personal casualty loss deductions for renters. There is no loss to claim in 2025 or 2027 regardless of contents loss size. Both people are in exactly the same position.
Persons I & J — No Loss Available in Either Year
Neither Person I nor Person J can claim a casualty loss on their contents. Post-TCJA, personal casualty losses for renters are eliminated except in circumstances that don't apply here. Their 2025 returns look identical — normal wages, no fire adjustment.
2027 (Edison $150K) — both identical:
| 2027 Item | Amount | Character | Tax |
|---|---|---|---|
| Edison property/contents (below basis) | $50,000 | Not taxable | $0 |
| Physical injury — §104 excluded | $30,000 | Excluded | $0 |
| Emotional distress (no physical injury) | $40,000 | Ordinary | $13,320 |
| Lost wages | $20,000 | Ordinary | $6,660 |
| Prejudgment interest | $10,000 | Ordinary | $3,330 |
| Total tax on Edison ordinary income ($70K) | $23,310 | ||
Large contents loss ($400K)
Small contents loss ($150K)
The Full Scorecard: All 10 People
| Person | Lane | Key Decision | 2025 Impact | 2027 Impact | Net Total |
|---|---|---|---|---|---|
| A | 1 — Gain client | Makes §1033 election | $0 | −$23,310 | −$23,310 |
| B | 1 — Gain client | No §1033 election | −$12,150 | −$120,510 | −$132,660 |
| C | 2 — Underinsured loss | Large loss · Files early | +$99,900 | −$77,470 | +$22,430 (+time value) |
| D | 2 — Underinsured loss | Small loss · Waits | $0 | −$13,320 | −$13,320 |
| E | 3 — Hidden gain ⚠️ | Correct analysis · §1033 election | $0 | −$16,650 | −$16,650 |
| F | 3 — Hidden gain ⚠️ | Incorrect loss filed | +$99,900 refund | −$113,000 | −$13,100 + incorrect return risk |
| G | 4 — Smoke damage | Large loss · Files early | +$99,900 | −$31,170 | +$68,730 |
| H | 4 — Smoke damage | Small loss · Waits | $0 | −$9,990 | −$9,990 |
| I | 5 — Renter | Large contents loss | $0 | −$23,310 | −$23,310 |
| J | 5 — Renter | Small contents loss | $0 | −$23,310 | −$23,310 |
All figures approximate, simplified for illustration. $300K wages, MFJ, CA resident, combined ordinary rate 33.3%, combined LTCG 24.3%. Not a substitute for advice on your specific facts.
You just saw what the wrong lane costs.
A tax consult reviews your actual basis, insurance, and Edison scenarios — so you file from the right lane with numbers you can defend.
Book an Eaton Fire Tax ConsultFour Things the Math Makes Clear
Lane 3 is the most dangerous lane — and it's less discussed than it should be. Person F ends up roughly net-neutral on dollars compared to Person E, which might seem like a draw. But Person F is net-neutral on what is very likely an incorrect return — one that claimed a casualty loss without verifying that adjusted basis was actually above insurance proceeds. That exposure includes accuracy-related penalties of 20% and interest accruing from the original filing date. The math looks survivable. The legal exposure is harder to quantify. If you bought your home before 2010 and are claiming a casualty loss, calculate your adjusted basis — including all improvements, correct land/structure allocation, and any prior adjustments — before that position goes on the return.
The §1033 election is the highest-stakes item for gain clients. Person B pays $109,350 more than Person A from one missing attachment. It's not a form. It doesn't auto-file. If your 2025 return was filed without it and the gain has been realized, you need an amended return conversation today.
Loss size is the critical variable in Lanes 2 and 4. Person C (large loss, underinsured) nets about $30K from filing early — defensible if that cash was genuinely needed. Person D (small loss) should wait, because Edison may eliminate the apparent loss entirely. In Lane 4, Person G nets $68,730 from filing early on a $400K smoke damage loss. Person H pays $9,990 by waiting on a $120K loss. The pattern is consistent: large loss relative to expected Edison recovery → filing early can make sense. Small loss → wait.
Renters have one lever and it's not timing. Persons I and J pay identical amounts regardless of how much they lost in contents. The only meaningful decision is physical injury documentation before signing the Edison settlement — worth $13,320 here and it closes the moment the agreement is executed.
The 2025 filing deadline doesn't move. And some of these decisions — the §1033 election, the casualty loss position, the settlement allocation — are permanent once made. If you haven't mapped your specific numbers against a realistic range of Edison outcomes, you're making a permanent decision without the full picture.
The blog teaches you the map.
I tell you where the landmines actually are on your map.
Reading every post here is free and you should do it. But here is what the blog cannot do for you:
Stress-test your specific assumptions. The frameworks in these posts are clean. Your situation is not. I ask the questions you don't know to ask — about your basis, your insurance allocation, your Edison timeline, your attorney's settlement language — and find the assumptions that are wrong before the IRS does.
Tell you which lane you're actually in. The five lanes look clean on paper. In real life, the facts are always messier. I've worked through 20+ Eaton Fire situations. Pattern recognition matters when a wrong lane assignment can cost you $100,000.
File the return correctly. Knowing what should go on your return and knowing how to prepare it are two different things. I prepare the return, draft the election language with your actual numbers, and make sure the IRS sees exactly what you intend them to see — not an approximation of it.
Coordinate your tax strategy with your legal strategy. Your Edison attorney is negotiating the settlement. Your insurance attorney is working the claim. Neither of them is thinking about your tax position. I bridge that gap — before you sign anything that locks in a bad outcome.
Stand behind the work if the IRS comes knocking. Audit representation is included in your fee. I back up what I put in writing. I've been doing this for 25 years and I'm not going anywhere. If we file it together and the IRS questions it, I'm in the room with you — not sending you back to figure it out alone.
25 years in tax controversy. 100,000+ returns. IRS, FTB, and CDTFA matters. Adam Libman is a California Registered Tax Preparer (CRTP) — not a CPA, EA, or attorney.
The tax side of this doesn't have to be one more thing that breaks you.
These numbers are emotional for you. For us, this is the work. We've sat across from 20+ Eaton Fire families, run the math, figured out the lane, and filed the return correctly. We make this manageable.
✓ Stress-test your assumptions
✓ Know which lane you're actually in
✓ File the return correctly
✓ Bridge your tax & legal strategy
🛡 Audit representation included. I back up what I put in writing. 25 years. Not going anywhere.
Book an Eaton Fire Tax ConsultAdam Libman is a California Registered Tax Preparer (CRTP) — not a CPA, EA, or attorney. Nothing here is legal advice.