@rachael_
Insurance proceeds from property losses are gains to the extent they exceed the adjusted basis in the property. So, yes, it is income (gain). However, the outstanding loan amount is irrelevant for determining gain. What matters is the original cost of the vehicle and any depreciation taken prior to the accident. To determine your gain, take the insurance proceeds ($32K) and subtract your basis (original cost less depreciation taken). So, for example, if you paid $40K for the vehicle and depreciated it down to $30K ($10K in accumulated depreciation), you will have $2K in gain from the insurance proceeds [$32K - ($40K-$10K)].
