You will report the loss of your rental property on Form 4684 Casualties and Thefts in Section B Business and Income Producing Property.
Using the figures you have provided the FMV of the house after the loss would be $95,000, (135,000 - 40,000) this amount will have to be reduced by any insurance payments you received and by the amount of depreciation that was taken on the property.
The amount remaining after deducting any insurance payments and depreciation will be the amount of your casualty loss. This link About Publication 547, Casualties, Disasters, and Thefts is to the IRS Publication 547 Casualty, Disasters an, Thefts
[Edited 03/11/2020 | 2:05 pm PDT]
