@KrisD15 wrote:
If you purchased the property for 100,000 and the building was worth 95,000 while the land was worth 5,000, you could in theory sell the land for 505,000 and not need to claim the income if Married Filing Jointly.
In your example, the maximum combined sale price for the house and land to not be taxed is the basis plus the exclusion minus the insurance payment.
Because most people have replacement cost coverage, it is very easy to get paid more than your basis. Suppose you bought the house years ago for $100,000 but the insurance company pays replacement cost at today's prices of $200,000 and you don't rebuild. Your basis is reduced to zero and $100,000 is a capital gain. Then if you sell the land, you have an additional capital gain. (These gains are still covered by the exclusion rules if you qualify.) Or, if the land must retain a basis, when the insurance pays $200,000, the land retains a $5000 basis but the gain from the insurance payout is $105,000. Then the gain from the sale of the land is the selling price minus $5000. The net gain from the combined sales ends up the same.
