As you know, the premiums you paid on that Rental Dwelling Insurance Policy was 100% deductible as a rental expense. Therefore every penny of payout you received from the insurance company is taxable income. Period. Now there's two possible ways you received the payout. You could have received one check that included the cost to rebuild *and* the loss of rent. Or you could have received two physically separate checks with one being for the loss of rent, and the other check being for the cost of rebuilding/restoration/repairs. If you got one check for everything, then you should also have separate documentation from the insurance company that specifies how much is for lost rent. Your typical rental insurance policy will include up to 85% of rent for an average of 9 months. Which one of these two payout possibilities applies to you? It matters.
Now you have to report things right on your tax return so that (hopefully) you don't end up with a multi-thousand dollar tax liability.
Also, for the lost rent payment, you *DO* have days rented after the destruction that made the place uninhapitable. If the insurance company paid you 85% of lost rent for 9 months, then you have 9 months it was rented "AFTER" it was uninhabitable. The insurance company paid you rent for that time, so the insurance company in effect, rented the property for that period of time they paid for "AFTER" the disaster. The fact that no one physically inhapited the property is irrelevant and doesn't mater. The insurance company did "IN FACT" rent it from you for the period of time they paid you up to 85% of the rent for each month "AFTER" the disaster. You "MUST" claim that payout as rental income just as if nothing happend.
Now for how you deal with the rest of the payout for the loss of the structure, that's a different story and depends on your specific and explicit situation.
In what year did the loss/distruction actually occur?
In what year you did you recieve the insurance payout?
In what year did you start rebuilding/repairing?
In what year was the rebuiliding/repairing completed?
In what year was the property "available for rent" again?
Finally, did the insurance company consider your disaster a total loss? This matters, because while it "may" have been a total loss for the insurance company, it was *NOT* a total loss for you in any way, form or fashion. THat's basically because you still have the land. (Insurance does not insure the land - they insure the structures "only" that are on that land.)
Depending on how you answer my above questions, I may have a write-up already that provides detailed guidance on how to report things in TurboTax on your tax return.
