Tax on insurance payment due to car deemed as total loss?
DJClayworth's response is generally correct. You wouldn't have to pay taxes on insurance benefits, since those are in fact bringing you whole to what you've lost. However, in some cases you do need to consider taxes. Specifically, if the insurance payout is higher than your cost basis in the lost property. While you may think that this never happens (why would the insurance company pay more than what it cost you?), it in fact quite frequently does. Specific example would be a car used in your business. If you used your car as part of your business and deducted car depreciation on your tax return - your cost basis was reduced by the depreciation. Getting a full car cost payout form insurance would in fact constitute taxable income to you for the difference between your cost basis (adjusted for the depreciation) and the payout. Another example would be collectibles. Say you bought a car 20 years ago at $5000, you maintained it well during the years (assume you spend another $5000 on repairs), and it is now insured at FMV of $50000. But, alas, it got destroyed by a mountain lion who climbed over the fence and pushed it over a cliff. You got a $50000 payout from your insurance company (because you insured it for full FMV coverage, as a collectible should be insured), of which $40000 will be taxable to you. There may be more specific cases where insurance payouts are (partially) taxable. However, as a general rule, they're not, as long as they're at or below your cost basis level. "Generally you do not pay taxes on insurance payouts that occur because of some kind of loss, provided you paid the premiums yourself. ""Generally, if you're paying premiums yourself, such as for homeowners insurance and auto insurance, then your insurance benefits are not a taxable event,"" says Adam Sherman, CEO of Firstrust Financial Resources in Philadelphia. ""Your benefits are reimbursement for expenses, rather than income."" It's not as straightforward for death benefits and life insurance."
Historically the advice was to buy the best policy possible (not cheapest), at the lowest price, with the highest benefit.  The cost relative to the benefit is very cheap, and your much more likely to use disability than life insurance (for instance).  It is usually cheaper to pay for it with after tax dollars than to buy more insurance. In theory, you want to buy enough disability to replace 100% of your after tax income -- or more since there is no inflation protection built into most policies.  Insurance companies often will not sell this due to moral hazard -- although you may be able to combine policies to reach 80% or so.   Keep in mind that you will need to continue to save / invest if you are on long term disability, since most policies cease payment at 65 or when your eligible for Social Security.  In addition, your expenses often rise due to the increased medical expenditures, possibly needing COBRA / private health insurance, etc. To avoid risk from rising interest rates, get a fixed rate mortgage. For the life of the mortgage your principal and interest payments will remain the same. Keep in mind that the taxes and insurance portion of your monthly payment may still go up. Because you own the property, the costs to maintain the property are your responsibility. If you rented this would be the responsibility of the owner of the property; if the cost to repair and maintain goes up so does the rent. Because you are the owner your annual costs to repair and maintain may go up over time. The way to eliminate risk of loss of value is to never move, until the mortgage is paid off. You will know exactly what principal and interest will cost you over the life of the loan. When you sell that will be essentially return on your payments. You don't know if the loss of value is due to world, national, regional, local or individual circumstances. so hedging is tough. If the fact that the mortgage is 95% is what makes you nervous, your biggest risk is risk of being upside down. That risk is greatly reduced by increasing the amount of the down payment. That decreases the risk that the value will be below the mortgage amount if due to unforeseen circumstances you have to sell immediately. The money will still be lost due to decrease in value, but you aren't forced to bring cash to the settlement table if you need to sell. The moment that you start to rent your car to strangers you are talking about using your car as a business. Will it be financially advantageous? If you can convince somebody to rent your vehicle for more than your required monthly payments then it might be. Of course you have to determine what would be the true cost of ownership for you. It could include your auto loan, and insurance, but you would be saving on the garage costs. Of course if you don't have it rented 100% of the time you will still have some costs. Your insurance company will need to know about your plan. They charge based on the risk. If you aren't honest about the situation they won't cover you if something goes wrong. The local government may want to know. They charge different car registration fees for businesses. If there are business taxes they will want that.  Taxes. you are running a business so everybody from the federal governemnt to the local government may want a cut. Plus you will have to depreciate the value of the item. Turning the item from a personal use item to a business item can have tax issues. If you don't own it 100% the lender may also have concerns about making sure their collateral survives. Is it safe? and from the comments to the question :  Should I do a contract or something that would protect me? Nope. it isn't safe unless you do have a contract. Of course that contract will have to be drawn up by a lawyer to make sure it protects you from theft, negligence, breach of contract.... You will have to be able to not just charge rent, but be able to repossess the car if they don't return it on time. You will have to be able to evaluate if the renter is trustworthy, or you may find your car is in far worse shape if you can even get it back. Your plan isn't bad, but it probably isn't worth the cost for the small amount of credit building it will achieve. If you do decide to continue with it though, you'll save in interest if you make the big payment now rather than in 6 months. In other words, you can take the minimum payment, multiply it by 5, subtract that amount from the total you owe and pay the difference immediately. This way you'll still get the 6 months of reporting to the credit bureaus, but you'll pay less interest since you'll have less principle each month. I would recommend applying for the credit card right now. I believe you'll probably get approved now. If you do, then pay off the car loan without thinking about it. (If you don't get approved, think about it, then probably still pay it off.) Regarding the full coverage insurance, even after the loan is paid off and you aren't required to have it, you may still want to keep it. Even if you're the best driver on earth, if someone hits you and doesn't have insurance, or they have insurance and drive off, or a deer runs in front of you, etc, you'll lose your car and won't be reimbursed. Also, as Russell pointed out in the comments below, without collision coverage your insurance company has no incentive to work on your behalf when someone else hits you, so even if it's not your fault you may still not get reimbursed. So, I wouldn't pass on the full coverage unless your car isn't worth very much or you can stomach losing it if something happens. Good luck, and congrats on being able to pay for a car in full at 19 years old. "I'm sorry to hear you've made a mistake. Having read the contract of sale we signed, I do not see any remedy to your current situation.  However, I'm interested in making sure I do not take advantage of you.  As such, I'll return the vehicle, you can return my money plus the bank fees I paid for the cashiers check, tax, title, and registration, and I will look at buying a vehicle from another dealership.   This seems to be the most fair resolution.  If I were to pay for your mistake at a price I did not agree to, it would not be fair to me.  If you were to allow this vehicle to go to me at the price we agreed to, it wouldn't be fair to you.  If I were to return the car and begin negotiations again, or find a different car in your lot, it would be difficult for us to know that you were not going to make a similar mistake again. At this point I consider the sale final, but if you'd prefer to have the vehicle back as-is, returning to us the money we gave you as well as the additional costs incurred by the sale, then we will do so in order to set things right. Chances are good you will see them back down.  Perhaps they will just cut the additional payment in half, and say, ""Well, it's our mistake, so we will eat half the cost,"" or similar, but this is merely another way to get you to pay more money.   Stand firm.  ""I appreciate the thought, but I cannot accept that offer. When will you have payment ready so we can return the car?"" If you are firm that the only two solutions is to keep the car, or return it for a full refund plus associated costs, I'd guess they'd rather you keep the car - trust me, they still made a profit - but if they decide to have it returned, do so and make sure they pay you in full plus other costs.  Bring all your receipts, etc and don't hand over the keys until you have the check in hand. Then go, gladly, to another dealership that doesn't abuse its customers so badly. If you do end up keeping the car, don't plan on going back to that dealership.  Use another dealership for warranty work, and find a good mechanic for non-warranty work. Note that this solution isn't legally required in most jurisdictions. Read your contract and all documentation they provided at the time of sale to be sure, but it's unlikely that you are legally required to make another payment for a vehicle after the sale is finalized.  Even if they haven't cashed the check, the sale has already been finalized. What this solution does, though, is put you back in the driver's seat in negotiating.  Right now they are treating it as though you owe them something, and thus you might feel an obligation toward them.  Re-asserting your relationship with them as a customer rather than a debtor is very important regardless of how you proceed. You aren't legally culpable, and so making sure they understand you aren't will ultimately help you. Further, dealerships operate on negotiation. The primary power the customer has in the dealership is the power to walk away from a deal. They've set the situation up as though you no longer have the power to walk away.  They didn't threaten with re-possession because they can't - the sale is final. They presented as a one-path situation - you pay.  Period. You do have many options, though, and they are very familiar with the ""walk away"" option.  Present that as your chosen option - either they stick with the original deal, or you walk away - and they will have to look at getting another car off the lot (which is often more important than making a profit for a dealership) or selling a slightly used car. If they've correctly pushed the title transfer through (or you, if that's your task in your state) then your brief ownership will show up on carfax and similar reports, and instantly reduces the car's worth.  Having the title transfer immediately back to the dealership doesn't look good to future buyers. So the dealership doesn't want the car back.  They are just trying to extract more money, and probably illegally, depending on the laws in your jurisdiction. Reassert your position as customer, and decide now that you'll be fine if you have to return it and walk away. Then when you communicate that to them, chances are good they'll simply cave and let the sale stand as-is." "This is a generic answer to this question, since I believe the UK requirements mean you have no choice in this particular situation. Ask yourself this question: If the boat sank, would you buy another boat? If the answer to that is ""yes"" then insurance is often worthwhile." You are correct. She cannot claim the initial loss of $1,000 on her taxes, she can only report the $500 profit. However, the IRS does allow her to add the $1,000 loss to the basis cost of her replacement shares. e.g. Reading IRS Regulations section 15a.453-1(c) more closely, I see that this was a contingent payment sale with a stated maximum selling price. Therefore, at the time of filing prior years, there was no way of knowing the final contingent payment would not be reached and thus the prior years were filed correctly and should not be amended. Those regulations go on to give an example of a sale with a stated maximum selling price where the maximum was not reached due to contingency and states that in such cases: When the maximum [payment] amount is subsequently reduced, the gross profit ratio will be recomputed with respect to payments received in or after the taxable year in which an event requiring reduction occurs. However, in this case, that would result in a negative gross profit ratio on line 19 of form 6252 which Turbo Tax reports should be a non-negative number.  Looking further in the regulations, I found an example which relates to bankruptcy and a resulting loss in a subsequent year: For 1992 A will report a loss of $5 million attributable to the sale, taken at the time determined to be appropriate under the rules generally applicable to worthless debts. Therefore, I used a gross profit ratio of zero on line 19 and entered a separate stock sale not reported on a 1099-B as a worthless stock on Form 8949 as a capital loss based upon the remaining basis in the stock sold in an installment sale.  I also included an explanatory statement with my return to the IRS stating: In 2008, I entered into an installment sale of stock. The sale was a contingent payment sale with a stated maximum selling price. The sales price did not reach the agreed upon maximum sales price due to some contingencies not being met. According to the IRS   Regulations section 15a.453-1(c) my basis in the stock remains at $500 in 2012 after the final payment. Rather than using a negative gross profit ratio on line 19 of form 6252, I'm using a zero ratio and treating the remaining basis as a schedule-D loss similar to worthless stock since the sale is now complete and my remaining basis is no longer recoverable.