Which Lane Are You In?
4 questions. 60 seconds. You'll see the exact tax math for your situation — not all ten scenarios. Just yours.
Question 1 of 4
Do you own the home that was destroyed or damaged?
Renting vs. owning changes everything — including whether a tax deduction even exists.
Your situation: well-insured, insurance likely exceeds your basis
The entire question for you is the §1033 election. You do not have a casualty loss. You have a gain — possibly a large one once Edison settles in 2027. Here's the math.
Person A — Makes the §1033 Election ✓
Person A's preparer attaches a written §1033 election statement to the 2025 return, deferring the $50K gain from insurance. In 2027 when Edison pays $500K, the total property gain reaches $400K — but the §1033 election covers it all, deferred into the replacement property. Only the ordinary Edison components ($70K) are taxable.
| Item | Amount | Treatment | Tax |
|---|---|---|---|
| 2025 conversion gain after §121 | $50,000 | §1033 deferred | $0 |
| 2027 Edison — property gain | $400,000 | §1033 deferred | $0 |
| 2027 Edison — physical injury | $200,000 | §104 excluded | $0 |
| 2027 Edison — ordinary components | $70,000 | Ordinary income | $23,310 |
| Total tax from the fire | $23,310 | ||
Person B — No §1033 Election ✗
Same facts. Person B's preparer doesn't attach the election statement. The $50K gain is taxed in 2025. When Edison pays in 2027, the $400K property gain has no §1033 protection and is taxed as capital gain.
| Item | Amount | Treatment | Tax |
|---|---|---|---|
| 2025 conversion gain after §121 | $50,000 | Capital gain (no election) | $12,150 |
| 2027 Edison — property gain | $400,000 | Capital gain — no protection | $97,200 |
| 2027 Edison — physical injury | $200,000 | §104 excluded | $0 |
| 2027 Edison — ordinary components | $70,000 | Ordinary income | $23,310 |
| Total tax from the fire | $132,660 | ||
§1033 election made
No election
Your action item
Confirm the §1033 election statement is on your 2025 return. If you haven't filed yet, it needs to be drafted before you file. If you already filed without it, an amendment may still be possible. A tax consult will confirm which position you're in and whether the election is salvageable.
Book an Eaton Fire Tax ConsultYou have a real casualty loss — and a real timing decision
Your insurance genuinely didn't cover your adjusted basis. Filing the loss in 2025 gets you a large refund now — but Edison's 2027 payment will come back as §111 ordinary income. Here's the full two-year math.
Person C — Files the Loss in 2025 (Large Loss)
Person C claims the $400K loss on the 2025 return. It wipes out $300K wages entirely, creates a $100K NOL. Refund: $99,900. Note: this position assumes the portion claimed wasn't subject to a reasonable prospect of Edison recovery — a standard practitioners apply differently.
| Item | Amount | Treatment | Tax |
|---|---|---|---|
| 2025 wages | $300,000 | Ordinary | — |
| 2025 casualty loss | ($400,000) | Wipes wages + $100K NOL | Refund $99,900 |
| 2027 Edison property — §111 recapture | $220,000 | Ordinary income (recapture) | $73,260 |
| 2027 Edison ordinary components | $40,000 | Ordinary income | $13,320 |
| 2027 NOL offset on recapture | — | Partial cushion | ($9,110) |
| Net tax position | Ahead ~$22,430 (+time value ~$30K) | ||
The alternative — Wait for Edison
If Person C waits, filing an open transaction disclosure in 2025, the Edison property payment in 2027 applies against the remaining loss cleanly — no recapture, no character conversion. Total tax: $13,320 on just the ordinary components.
Your action item
The key question now: did you file the loss in 2025? If yes, you need to understand the §111 recapture position before Edison settles. If not, a protective open transaction disclosure and §1033 election should be in place. A tax consult will confirm the right move.
Book an Eaton Fire Tax ConsultYour apparent loss may disappear when Edison settles
A smaller gap between basis and insurance looks like a loss now — but if Edison's payment is large enough, it can eliminate the loss entirely and even create a small gain. Filing early here is almost never the right move.
Person D — Waits for Edison ✓
Person D files an open transaction disclosure in 2025, makes a protective §1033 election, and waits. When Edison pays in 2027, the total property recovery ($650K insurance + $220K Edison property) = $870K — which actually exceeds the $800K basis by $70K. The apparent loss has become a small gain.
| Item | Amount | Treatment | Tax |
|---|---|---|---|
| 2025 return | — | Open transaction disclosure only | $0 |
| 2027 net property gain (after §121 n/a) | $70,000 | §1033 deferred if reinvesting | $0 |
| 2027 Edison ordinary components | $40,000 | Ordinary income | $13,320 |
| Total tax from the fire | $13,320 | ||
Your action item
If you haven't filed yet: file an open transaction disclosure, not a loss claim. If you already filed a loss on a small-gap situation, you need to understand what §111 recapture will look like in 2027. A tax consult will map this out before Edison settles.
Book an Eaton Fire Tax ConsultStop. You may have a gain, not a loss.
You feel underinsured. You can't rebuild what you had. But feeling underinsured relative to replacement cost is not the same as having a tax loss. The only thing that matters is insurance vs. your adjusted basis.
Person E — Correct Analysis, §1033 Election ✓
| Item | Amount | Treatment | Tax |
|---|---|---|---|
| 2025 insurance gain (after §121 covers $350K) | $0 | §121 exclusion | $0 |
| §1033 election attached to return | — | Written statement filed | Protected |
| 2027 Edison property gain ($150K above §121 cap) | $150,000 | §1033 deferred | $0 |
| 2027 Edison ordinary components | $50,000 | Ordinary income | $16,650 |
| Total tax from the fire | $16,650 | ||
Person F — Filed an Incorrect Casualty Loss ✗
Person F's preparer compared FMV ($1.4M) to insurance ($700K) and claimed a $400K loss. The correct calculation — basis vs. insurance — shows a gain, not a loss. The $400K casualty loss is almost certainly incorrect.
| Item | Amount | Treatment | Tax |
|---|---|---|---|
| 2025 incorrect casualty loss claimed | ($400,000) | Very likely incorrect | "Refund" $99,900 |
| 2027 Edison property — §111 recapture | $300,000 | Ordinary income (recapture) | $99,900 |
| 2027 Edison ordinary components | $50,000 | Ordinary income | $16,650 |
| Penalty exposure (20% accuracy) | — | Audit / penalty risk | Additional |
| Net cash position | −$13,100 + penalty/audit risk | ||
Your action item
Calculate your actual adjusted basis before anything else. A tax consult will verify your basis, confirm your lane, and — if you've already filed a loss — determine whether an amended return before Edison settles is the right move.
Book an Eaton Fire Tax ConsultYour home is standing — and the math for filing early is strong
Large FMV decline relative to what Edison is likely to pay is the one scenario where filing early produces the clearest financial benefit across all ten people.
Person G — Files the Large Loss in 2025 ✓
| Item | Amount | Treatment | Tax |
|---|---|---|---|
| 2025 casualty loss (FMV decline − insurance) | ($400,000) | Wipes wages + $100K NOL | Refund $99,900 |
| 2027 Edison property — §111 recapture | $130,000 | Ordinary (partial recapture) | $43,290 |
| 2027 Edison ordinary + injury | $70,000 | Mixed (injury excluded) | $9,990 |
| NOL carryforward cushion | — | Partial offset | ($21,180) |
| Net ahead after two years | +$68,730 | ||
Your action item
The math favors filing — but the FMV decline needs to be properly documented and the "reasonable prospect of recovery" analysis needs to be done before claiming. A tax consult will confirm the position and document the defensible number.
Book an Eaton Fire Tax ConsultYour FMV decline is likely covered by Edison — wait
A moderate FMV decline from smoke or partial damage often gets fully covered by Edison's property settlement. Filing the loss early puts you in the §111 recapture trap for a gain that probably wasn't worth the risk.
Person H — Waits for Edison ✓
Person H waits. In 2027, the $130K Edison property payment covers the $120K loss and then some. Total property recovery slightly exceeds the FMV decline — no net loss to claim. The $10K excess reduces basis. Only ordinary components are taxable.
| Item | Amount | Treatment | Tax |
|---|---|---|---|
| 2025 return | — | Open transaction disclosure only | $0 |
| 2027 net property: recovery exceeds loss | — | No loss; excess reduces basis | $0 |
| 2027 Edison ordinary components | $30,000 | Ordinary income | $9,990 |
| Total tax from the fire | $9,990 | ||
Your action item
File an open transaction disclosure in 2025 and wait for Edison. Confirm the FMV decline is properly documented (before/after appraisal or comparable sales data). A tax consult will confirm the right position and what to prepare before Edison settles.
Book an Eaton Fire Tax ConsultNo casualty loss is available — but you have one lever
The TCJA eliminated personal casualty loss deductions. You cannot deduct your contents loss in 2025 or 2027, regardless of how much you lost. But how your Edison settlement is allocated can save over $13,000.
| Edison component | Amount | Treatment | Tax |
|---|---|---|---|
| Property / contents recovery | $70,000 | Not taxable (below basis) | $0 |
| Physical injury — documented | $40,000 | §104 excluded | $0 |
| Emotional distress (flowing from physical injury) | $40,000 | §104 excluded if injury documented | $0 |
| Tax if physical injury documented | $0 | ||
Your action item
Before you sign anything with Edison: gather documentation of any physical injury — respiratory issues, smoke inhalation treatment, hospital or urgent care visits, anything showing bodily harm. That documentation is worth $13,320 in this scenario. It closes the moment you sign. A tax consult will help you understand how to position the settlement allocation before it's final.
Book an Eaton Fire Tax Consult