I think you're just not "getting it" yet. Took me awhile before I got it to. Basically you're recapturing the depreciation by adding it to the value of the land. Then you pay your taxes on that depreciation when you report the loss and insurance payout in the Casualty & Thefts section. It's important to click the links in the Casualty & Thefts section and read them. It tells you that you will reduce your loss by the amount of depreciation taken. That makes the "depreciation part" of the insurance payout taxable income. The program also gives you the option to defer paying taxes on that gain until the year you sell the property too, if you want. Remember, when reporting it in the Casualty & Thefts section you are NOT claiming a total loss of what you paid for the property. You DID NOT lose the land. Your loss, is the value of the structure ONLY, minus the depreciation already taken on it.
