The accountant is actually putting it under Rental Income on our taxes, and I can't understand why.
Because he's doing this in what is probably the "best way" on the tax front, for the long term.
Typically, all income for rental property received from any source for any reason, is reportable as rental income. An insurance payout is reportable income. That's because the insurance premiums you paid were a tax detuctible rental expense. Therefore, the payout is reportable and in many cases, also taxable as such.
Now lets say you have $50,000 of damage to your rental property and it costs you $50K to fix it up and make it rentable again. Generally with that much damage it's not a "repair" per-se. For example, say a tornato takes the roof off and it's $50K for a new one. So the insurance pays out $50K for a new roof, and you spend every penny of it on that new roof.
The $50K payout is rental income. The $50K new roof is added as an asset and depreciated over the next 27.5 years.
So if you originally paid $100K for the property, with that new roof your new cost basis in the property is now $150K. When you sell the property for say, $200K later down the road, you'll only be paying taxes on a $50K gain, plus any depreciation you're required to recapture.
So while the replaced roof may not increase the value of your property, then at a minimum it does "maintain" the current value. It also increases your cost basis in the property which matters big time when you sell the property.
