@Anonymous_ wrote:
@Opus 17 wrote:
You start with your adjusted cost basis, that is the original purchase price, plus the cost of improvements...
Just to be succinct, I do not disagree that reporting could be appropriate for the receipt of the insurance proceeds in 2022 but your assessment of the figures is off.
The $370,000 received was received as an insurance limits claim for a house that was completely destroyed; the land was not involved in this transaction whatsoever and needs to be accounted for separately.
Basis and value are not the same thing. The taxpayer bought real property (land plus a house) for $150,000. They received $370,000. Therefore, their basis is reduced to zero, and there is a $220,000 gain (ignoring the effect of improvements and the exclusion). The land has value, certainly, but the basis (the amount the taxpayer has invested in the land) is zero because of the reimbursement.
There is nothing in publication 547 that says the basis of the land must be accounted for separately. Publication 551 does indicate basis must be allocated, but that is for depreciation purposes, which is not involved here. If the basis must be allocated for non-business real property as well, then the taxpayer has a larger gain in 2022, which might exceed their exclusion if they are single or MFS.
