@Anonymous_ those are just other forum posts. But I stand corrected, as I see where my misunderstanding came from. I found it in IRS Pub 527 page 8, to wit:
Decreases to basis. You must decrease the basis of your property by any items that represent a return of your cost. These include the following.
• Insurance or other payment you receive as the result of a casualty or theft loss.
So if you decrease the basis by the amount of insurance paid out, that will account for that insurance payout in the long run down the road when the property is sold.
Whereas if the insurance payout exceeds the cost of the repair (not all that common, but not unheard of either), then the excess payout is reported as rental income. If I recall correctly, there's a specific form that is used for reporting the excess. Not sure if it applies to rental property, or if you just include the excess payout in the total rental income received for the year.
