you must subtract any insurance reimbursement from the cost of the capital improvement.
Not so in this case. Remember, the insurance premiums paid were tax deductible. Therefore, any insurance payout is reportable as rental income. Therefore, it's included in the total rental income received for the year. Then the portion of that income used for the property improvement is capitalized and depreciated.
Though this is not always true 100% of the time (exceptions are not that common), the general rule is, any income received from any source for any reason pertaining to rental property, is included in and reported as rental income. This usually does include any insurance payout, since the insurance premiums were deductible as a rental expense. But even so, the total cost of the improvement adds to the cost basis of the property (structure only in this case, which is why it's entered as a physically separate asset with a land value of $0)
Overall, you reduce your original cost basis by the value of the loss, then increase that reduced cost basis by the value of the improvement. Since reducing the cost basis on an asset in TurboTax is complicated, requiring the user to jump through hoops of fire over a boiling pit of lava, it's generally easier/simpler to give the property improvement a value equal to the increased value of the property that is above it's original cost basis, and just leave that original entry alone.
