Let's say for example you had a rental that cost $100K and it had $35K of damage.
You fixed it and it cost you $35K and the insurance company paid you $35K.
The insurance $35K is not income it only reimburses what you fixed back to the way it was. The tax impact is $0 in this case, and the cost is still $100K (what you paid for it).
Now say you only got $34K in the example above, then the $1K might be deducted as an expense in 2013 or added to the basis or cost of the rental, if so then the cost would be $101K.
