Tax and financial advice from the Silicon Valley expert.

Lessons From Our Fire Recovery Experience

Our family home was destroyed in a fire two days before Thanksgiving, 2015.  On November 29, 2018, we sent the final payment to the fire restoration company, three years after the destruction of our home.  (The restoration was finished during September, 2018 and we received the final payment from our home insurance claim late November, 2018.)  I thought readers might be interested in what our experience was like and the lessons that we learned that might help other victims of fires and to prepare for the possiblility of a fire or other disaster.

First, we had enough insurance to cover most of the cost of restoring our home and personal property.  The process of getting those benefits was rather horrific, but we got through it without the help of a public adjuster.  I’m not certain that “everyman” could.  Since I am a CPA with business management experience and my wife, Janet, understands home design, we were able to manage the process with a lot of help.

What is a public adjuster?  A public adjuster is a company that helps people who have suffered disaster losses to get the maximum recovery from their insurance company.  For this service, they receive a hefty fee.  I understand it’s 5 – 10% of the total recovery.  For some people, this is a worthwhile investment.  We were able to get the policy limits for our recovery, so we were fortunate to get through the process without a public adjuster.

It’s probably a good idea to review your policy benefits with your property insurance agent to really understand your coverage.  I understand some people have lost their coverage after making a claim like this.  So far, our property insurance company is continuing ours.

As I watched our home burn, a representative from a fire recovery company put his arm over my shoulder and reassured me, “Mike, I’m going to rebuild a beautiful new home for you.”

I asked him, “Can you have the rebuild done by next Christmas?”  He reassured me that he thought he could.  I might not have given them the job if I knew in advance that it would take almost three years!

We spent the night of the fire sleeping in my daughter’s front room.  It was one of the most miserable and uncomfortable nights of my life.  The next week or so our insurance company paid for our lodging at a Residence Inn, which was great.  The Residence Inn provided breakfast and a Happy Hour buffet on several nights, so we didn’t have to go out for dinner on most nights or for breakfast.

Our homeowner’s insurance policy provided living accomodations replacement for two years, so we shortly moved to a furnished rental home located close to my daughter’s family.  My granddaughters thought it was great that Grandma could walk and pick them up from school.  The insurance also covered additional living expenses, including some meals and additional mileage to commute to work compared to our regular residence, and duplicate expenses for utilities and garbage.

It’s very important to keep good records during this process to identify duplicate living expenses, including the utilities costs for both your regular residence and the rental residence, to get reimbursements for duplicate expenses.  (In Santa Clara County, garbage  pickup is included on the real estate tax bill.)

When our two years was over, the insurance company informed us they would no longer cover the rental for the home.  The rebuilding of our home was only about half done.  There wasn’t even a front door and no furnace for heat!  We moved into our unfinished home and slept on the (unfinished) floor using inflatable mattresses.  There was one working sink and one working toilet.  We lived in our home while the restoration company finished rebuilding it.

Your property insurance agent does not handle your fire loss claim.  The insurance company assigns adjusters to do that.  We had separate adjusters for the building and for personal property (furniture, clothing, etc.)  The adjuster might be an employee of the insurance company of an independent contractor.  A big irritation in this process is the insurance company routinely rotates adjusters off cases every few months.  This means your file is neglected for some time and you have to get another person up to speed.  We kept in touch with our insurance agent to act as our advocate with the company to keep the momentum going processing our claim and reduce the rotation of adjusters on our case.

The initial two people that we worked with at our restoration company were actually very helpful.  One of them had previous experience as an adjuster for a property insurance company.  They gave us some coaching about the process and how to deal with our property insurance company.  The other one actually wrote some software for us to make it easier to make the list of personal property lost in the fire.  This was enormously helpful.  With his software, we could look up items on the internet to give references for replacement costs and where they came from.  These people left the company, one about a year after our loss when we made the initial personal property loss report and the other a few months before our house rebuild was finished, requiring us to get another representative up to speed to finish the job.  This created more inconvenience because he wasn’t familiar with our case.

Recreating our personal property list was a huge job.  It required listing in detail all of the items in each room of the house.  I have a pretty good memory and can summon a picture of what was where.  Not everyone is so fortunate.  My wife, Janet, walked through stores looking at the shelves for items that we lost, taking picture of items and their prices with her smart phone.  Although the personal property adjusters said to focus on the high value items, small value items really add up.  Looking back, it would have been great to have photos or videos as a tour of the house showing everything.  We had CDs of our photos that weren’t kept outside the house in a safe deposit box, so they burned.  Now many people are putting photos and documents “in the cloud”.  A good idea!

Again, be sure to keep your receipts for replacement items, including clothing, towels, razors, toothbrushes, toothpaste, etc.  You also have to list in detail what the receipts are for.  (For example, state if out bought the Phantom of the Opera DVD.)  You might need to attach your receipt to a separate piece of paper with a list of items purchased with the amounts.

Initially, our policy paid for the depreciated value of items.  It paid for replacement cost when we provided copies of receipts and the items were purchased within two years after the fire.  Those receipts are the documentation of the cost of the replacement items.  They can also be important income tax records.  According to the rules for involuntary conversions (such as a fire), if there is any gain from the insurance recovery, it isn’t taxable provided the item is replaced for at least the amount recovered.

Since the rebuild of our home wasn’t done in two years, we ordered some furniture with delayed delivery and put appliances (dishwasher, refrigerator, washing machine, dryer, microwave oven, stove, trash compacter) in the garage.  We couldn’t delay the delivery of some furniture that we bought at a consignment store (a great source for antique/wood furniture!) so we just had them put it in our unfinished home.  As we approached the two year date, our personal property adjuster made an extra effort to come to our home and help us assemble the information so that we reached our policy limit.

We had to replace many documents, like vehicle pink slips, passports, social security cards and birth certificates.  The cost of replacing these items were included in our insurance claim.

Rebuilding our home was like a slapstick comedy.  There were many miscommunications leading to many false starts.

The restoration company was able to make an accurate model of our home, using laser equipment.  Too bad the architect ignored the model.  You’d think the plans might be on file with the City of San Jose.  Nobody got them.  Some of our neighbors have homes with the same exterior and floor plan as ours.  Nobody bothered to check them out.

There were several errors in the plans prepared by the architect.  The architect was not located near our home.  Each time the plans were changed, they had to be approved by the City of San Jose building department.  In some cases, it took months to get the approval for the changes.  Building would usually stop when waiting for the approval.  Finally, we got to the point of harassing our restoration company to get changes processed more quickly and to expedite getting approval by the City of San Jose.

Some examples of the plan corrections:

  • We have an open staircase, which gives a very open look when entering the house. The architect’s plan had an enclosed staircase.
  • We have a family room – kitchen, which is one large open room. The architect’s plan had a wall between the family room and kitchen.
  • We have vaulted ceilings in the master bedroom and the front room. The architect’s plan didn’t have vaulted ceilings.  (This required a major change in the “truss” plans for our roof and changes in the ventilation for the HVAC for the house.)
  • The architect’s plan omitted the linen cabinet for the upstairs hallway.
  • The architect’s plan didn’t include the furnace or air conditioning(!)

The architect and the builder didn’t know which codes applied for some items, such as the insulation for the vaulted ceilings, and how the frame for the house is attached to the foundation.  Items like this required rework and multiple inspections.

City inspections also became an issue.  Waiting between inspections resulted in more delays waiting to continue building.  Finally, I called my city council representative and got the direct telephone number for the inspector and was able to expedite having inspections done.

The builder was in a fog about ordering many items.  Janet and I regularly had to go to the hardware store to keep things moving by buying ceiling lamps, faucets, sinks, toilets, cabinet handles, fireplace mantle, etc.

We had turnover of the construction foreman for the restoration company.  The first foreman was great, but left after only a few weeks on the job.  The second foreman was congenial, but didn’t seem to actively manage the job.  There were several items that he said he would take care of, such as ordering floor tile, getting the gas fireplace, and the mantle for the fireplace, that we ended up taking care of ourselves.  More delays!

If we didn’t manage the reconstruction of our home and keep pressing to get the job done, it might have taken two more years to finish it!

I did quite a bit of research relating to the tax rules for an involuntary conversion (replacement after a disaster.)  I recommend that you consult with a tax expert if your home is destroyed by a fire.  One thing to be aware of is that you apply the exclusion for sale of a residence, $250,000 for an individual or $500,000 for a married couple, before applying the exclusion for replacement property, so you get a basis increase from the involuntary conversion of a principal residence.

In summary, you can’t passively rely on others to take care of the restoration of your home, replacing your property and getting the maximum insurance recovery.  You have to pay attention and be actively involved in the entire process, including watching insurance deadlines.  If someone else says they’ll handle it for you, be prepared to pay a hefty fee and be prepared to be disappointed and step in when necessary.

New IRS guidance for deferral of income from stock options and RSUs

The IRS has issued guidance for a new election to defer taxable income from exercising or vesting of an employee stock option or vesting of restricted stock units (RSUs).  The election is part of the Tax Cuts and Jobs Act of 2017, enacted December 22, 2017.

The new law for the election is at Internal Revenue Code Section 83(i).  The IRS guidance is Notice 2018-97, issued December 7, 2018.  The Notice is 19 pages long.

Congress was trying to provide some relief to employees who have stock-based compensation when the stock isn’t publicly traded or eligible for redemption.  The stock can’t be sold to get the cash to pay taxes.

Under the new law, the income of a taxpayer from exercising an employee stock option or from the vesting of an RSU who makes the election for qualified stock won’t be taxable until the earliest of:

(1) The first date the stock is transferable, including transferable to the employer;

(2) The date the employee first becomes an excluded employee;

(3) The first date on which any stock of the issuing corporation becomes readily tradable on an established securities market;

(4) The date that is five years after the first date the rights of the employee in such stock are transferable or not subject to a substantial risk of forfeiture, whichever occurs earlier; or

(5) The date on which the employee revokes the election (at such time and in such manner as the Secretary of the Treasury (IRS) provides.)

The requirements to qualify for the election are so onerous that I don’t expect many companies to meet them.  In a calendar year, not less than 80% of all employees who provide services to the corporation in the United States or any possession of the United States must be granted stock options or granted RSUs, with the same rights and privileges to receive qualified stock.  Stock options and RSUs usually are not used in such a nondiscriminatory way.

The notice makes it clear that this test applies each year, and grants of options and RSUs in previous years aren’t counted for the test.  Also, the test applies for all employees of the company during the calendar year, regardless of when hired or terminated.

I’m not going to explain in detail who is an “excluded employee”  It’s basically an individual who already owns at least 1% of the company stock or is a key officer of the corporation.

This is a separate election from a Section 83(b) election to treat nonvested stock received as if it was vested, accelerating income from the exercise of a nonqualified stock option.  If a Section 83(b) election is made relating to the exercise of a nonqualified stock option, the transaction isn’t eligible for a tax deferral election under Section 83(i).

If a Section 83(i) election is made for an incentive stock option or a purchase using an employee stock purchase plan, the benefits of those sections no longer apply and the transaction is treated as the exercise of a nonqualified stock option.

The income amount is based on Internal Revenue Code Section 83(a), which is the excess of the fair market value on the later of the date of exercise or the vesting date.  That date also determines when the Section 83(i) election must be made.  The election must be sent to the IRS address for the taxpayer’s federal income tax return no later than 30 days after the later of the date of exercise or the vesting date.

The IRS did not provide an example of a Section 83(i) election in the Notice.  It just says the election “shall be made in a manner similar to the manner in which an election is made under Section 83(b).”  There are important differences.  If you would like to have an example of the election that I drafted, write to me at

Any time a corporation transfers qualified stock to a qualified employee, it is required to notify the employee that the employee may be eligible under Section 83(i) to defer income on the stock.  The notice should be provided at the time an amount attributable to the stock would first be includible in the gross income of the employee, or a reasonable time before.  The notice states:

(1) The amount of income to be reported at the end of the deferral period will be based on the value of the stock at the time the rights of the employee first become transferable or not subject to a risk of forfeiture, even if the value of the stock declines before it becomes taxable;

(2) The income recognized at the end of the deferral period will be subject to federal income tax withholding at the highest federal income tax rate, with no reduction for personal exemption credits or estimated tax deductions;

(3) The responsibilities of the employee with respect to the withholding.

If an employer fails to provide the notice, it will be subject to a $100 penalty, up to a maximum of $50,000 per calendar year.

Although the federal income tax is deferred when the election is made, the amount that would otherwise have been taxable is currently subject to federal employment taxes, like social security, medicare and federal unemployment taxes.  (This could still be a hardship for employees who receive no cash and can’t sell the stock.)

Under authority provided to the IRS in the new tax law, the Section 83(i) election by the taxpayer must include an agreement that the deferral stock will be held in an escrow arrangement.  When the income relating to the stock becomes taxable, the corporation may remove shares equal in value to the required income tax withholding.  The shares may be removed up to March 31 of the year following the year the income is taxable.  The remaining shares can then be released to the employee.  The employee can alternatively pay the tax with cash, in which case all of the shares would be released to the employee.

A corporation can preclude its employees from making a Section 83(i) election by declining to establish an escrow arrangement to hold their shares until the federal income tax is paid.

If a corporation intends that employees shouldn’t make Section 83(i) elections for stock received by exercising a stock option or RSU, the terms of the stock option or RSU may provide that no election under Section 83(i) will be available with respect to stock received under the option or RSU.

This new election is a baby step.  I hope Congress provides more helpful relief to employees who receive stock options and RSUs of stock that isn’t publicly traded with more simplified rules in the future.







Tax and financial advice from the Silicon Valley expert.