@Anonymous_ wrote:
@Caroleg22 wrote:
We recieves a payout in 2023 for 370,000.
You received $370,000 from the insurance company for the house and then another $150,000 when you sold the land to a third party?
If so, that would be a total "selling price" for your property of $520,000. Subtract your basis and that would be your gain.
I respectfully disagree. The $370,000 is a taxable capital gain transaction in 2022, when you received the payment (per IRS publication 547, starting on page 18).
https://www.irs.gov/pub/irs-pdf/p547.pdf
You start with your adjusted cost basis, that is the original purchase price, plus the cost of improvements. Let's say you can establish $50,000 of improvements, so your cost basis is $200,000. You have a capital gain in 2022 of $170,000. You can use the personal exclusion, and not pay tax on the gain. You don't have to report it on your tax return (unless you get a 1099-S form), but keep records of what you did for at least 6 years in case of audit.
If you bought a replacement property with the insurance money (we didn't ask about this), you can choose to postpone this gain and transfer the basis to the new replacement property, and not use the exclusion at all. See publication 547 on page 18. You also don't need to report the loss/gain on your 2022 tax return, unless you got a 1099-S form. Just stay silent to the IRS, but keep records for as long as you own the replacement property. And you might want professional assistance to help you determine your basis in the new property.
Now, your adjusted basis in the land alone is zero, so the payment in 2024 of $150,000 is all taxable capital gains. The question is whether you can extend the exclusion to cover the land (in my example, you have $80,000 of the exclusion left if you file single or married filing separately and $330,000 of the exclusion left if married filing jointly.) If you bought a replacement property and postponed the gain, then you did not use your exclusion at all, and you can use it now. If you did not buy replacement property, and you used your exclusion in 2022, then I have two thoughts, and I don't know which is correct.
a. If you sell the land within 2 years of the fire, you can include the land in your exclusion, meaning it is partly taxable if you are single, and excludable if you are married filing jointly.
b. If you sell in less than 2 years it is not excludable because you used your exclusion and you can only use it once every 2 years, but if you sell after 2 years (and before 3 years) you can use your exclusion because you meet the 2 year/5 year rule and you have not used your exclusion in the prior 2 years. (And in this case you would get a full exclusion and not a partial one, because it was more than 2 years so the exclusion resets.)
I think the correct result for 2024 is to report a selling price of $150,000 and a cost basis of zero, and I think you can claim the exclusion of $80,000 if you are single and sold in less than 2 years, or an exclusion of $250,000 or more if you are married or you waited more than 2 years. I also think that postponing the gain into a replacement property is not financially sound in your situation unless you plan to sell the replacement property in less than 2 years. However, you might want to review these scenarios with a professional.
@rjs @DoninGA do you have thoughts?
