Basically what's happening here, is that you have to account for the depreication already taken on the property prior to the fire. When you sell, all depreciation has to be recaptured and you pay taxes on that recaptured depreciation in the year you sell the property. So in order to account for that depreciation in 2017 without you having to recapture it ant pay taxes on it in 2017, you add that depreciation to the cost of the land. As you know, land is depreciable. So by doing this you "account" for that depreciation, and you won't pay taxes on it until the year you sell the property. Since you sold it in 2017, this all "works out in the wash" for you just perfect.
After doing all the above, the answer box below is how you will report the sale. You'll just work through the Rental & Royalty Income (SCH E) section again and use the guidance below to report the sale. Piece 'o cake!
