If the insurance proceeds exceed the cost of repairs, the gain is calculated on Form 4684 and reported on Form 4797 (the excess is not reported as rental income on Schedule E).
If the insurance proceeds equal to cost of repairs, the proceeds do not need to be reported at all and no adjustment needs to be made in the basis of the property. If a taxpayer wants to report the proceeds, then the concomitant expense can be deducted (so it is a wash).
@Carl wrote:
@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.
That is basically half the story with respect to proceeds, If the entire proceeds are used for restoration of the property, the basis is not decreased.
There could be some sort of "fiction" where basis is decreased to the extent of insurance proceeds received but then basis is increased by the amount of those proceeds spent on restoration.
