Some of the information I provide below, I know you already know. I'm just stating "the obvious" to ensure we're both on the same page here. So bear with me.
Fire at one of my residential rental properties in 2022 rendered that building uninhabitable and I received an insurance payout for total loss, including a loss rents payout.
For clarity, while it may be a total loss for the insurance company, it is not a total loss for you. This is because the insurance company only insures the structure. They do not insure the land. So basically, you 'Sold' the structure to the insurance company, and retained ownership of the land.
Loss of rents was added to rental income but I decided not to try adding the entire payout to income and to try to go the sale route instead, keeping the land.
That choice is fine, and in your case is probably the better way to go.
Burned building and most assets have already been totally depreciated. Adjusted basis of subject property assets = < $100.
Lets split up the structure and the land into two different assets, so you can actually show the sale of the structure to the insurance company in 2022, while retaining ownership of the land. You say the structure is fully depreciated. So that's what I'm going with.
Start by entering a new asset classified as residental rental real estate.
- Use the original "in service" date.
- In the COST box enter only the value of the structure
- For COST OF LAND enter zero. This ensures the entire value of this asset is depreciated correctly so the numbers match the original entry for the property asset.
- Since you state the structure is fully depreciated, I'm expecting you to enter the same amount for "prior years depreciation" that is shown for that, in the original entry for the property asset. If there's any additional depreciation to be taken in 2022, the program will figure that, based on the date of the fire, which we'll deal with later.
Next, enter another asset classified as Residential Rental Real Estate, and again use the same in service date used for the original entry.
For COST, enter the value of the land.
COST OF LAND will be the same as in the COST box. This way, nothing on this asset is depreciated since land is not a depreciable asset.
Now at this point, you can delete the original asset that has both the structure and land in it. Then it's important you finish working through the SCH E section entirely. Otherwise, the program may not "do the math" correctly for what comes next.
Now get back into Rental & Royalty Income (SCH E) and elect to edit that property again. In the assets/depreciation section. You should see listed there an asset for the structure, and another asset for the land. Elect to edit the structure asset and work it through to report the sale of the structure only, to the insurance company for the payout (minus the loss rents already reported as rental income, of course.)
I'm trying to work through the insurance payment as a sale, keeping the land in 2022 which I'll have to revisit on the next tax year for the pending sale.
My guidance above "should" allow you to do that. For any other assets listed that were lost in the fire, I assume you know how to handle them. Myself, if the value is not all that much, I'd just indicate I stopped using the asset in 2022, and on the "Special Handling Required?" screen I'd select YES. That way, I'm showing disposition of those assets without having to deal with "sales" information. Then those additional assets can just be deleted on next year's return.
