Will my insurance company send me a 1099?
I would fully expect them to. But they may not be required to. That doesn't negate your requirement to report the payout though.
Why is the insurance payout reportable/taxable?
When it comes to rental property, the insurance premiums you pay each year are a tax deductible business expense. Therefore, any payout on that policy is reportable income and may also be taxable. Typically, what the insurance pays out for is the loss of an asset that was being depreciated. The taxability of the payout can be offset by claiming the remaining depreciation of the asset that was lost, as a loss in the Casualty and Thefts section of the program under the Deductions & Credits tab.
For you, the first thing you have to do is figure the value of "just" the roof that was replaced, which would be a percentage of the entire value of only the structure. Then the depreciation taken on the roof would be an equal percentage of the total depreciation already taken on the entire structure. Then you can claim a loss on that value only for the percentage of depreciation "not" already taken on that value.
For someone whose dealt with this before, the math is rather simple. But more than likely at this point, the reader of this post is a bit lost. Here's the math.
As shown in TurboTax:
COST: $150,000
COST OF LAND: $50,000
The above indicates a structure value of $100,000. The roof was damaged by hail and while it doesn't leak, there's no question (according to the insurance adjuster) that it will leak during or after the next storm that brings high winds. So insurance agrees to replace it.
When I had a new roof put on back in 2010 the cost was $10,000. That's 10% of my total structure value. To keep the math simple, I didn't start renting the property out until 2012. So I had included the cost of the roof in my total cost basis at the time I converted the property to a rental. So the value of the roof was 10% of the value of the structure.
By the time of the roof damage I had already taken $30,000 of depreciation on the structure. Since the value of the roof is 10% of the value of the structure, that means 10% of the depreciation can be applied to the roof. So I already have $3000 of depreciation taken on the roof. Since I've aleady deducted that $3,000 on the roof that I originally paid $10,000 for, that means I can claim a $7,000 loss in the Casualty and Thefts section.
The payout for the new roof was $14,500 after my deductible of $500, and the new roof cost me $15,000. I will enter that new roof as a physically separate asset in the Assets/Depreciation section of the SCH E, classify it as residential rental real estate with a COST of $15,000 and COST OF LAND of $0 depreciated over 27.5 years. Depreciation starts on the date that new roof was placed in service - typically the day the work was completed assuming you still had renters in the place.
The values of the original entry in the Assets/Depreciation section do not get changed, as the taxability of the $14,500 payout of the insurance company is offset a bit by your $7,000 loss claimed in the Casualty & Thefts section. With this example, the remaining $8000 probably won't be taxable either, because it will be used to offset your carry forward losses on the property.
If the damage was so extensive that the renters had to vacate, thus not required to pay rent, that does not change the fact that the property was still rented. Every rental dwelling insurance policy I have ever seen (for residential rental real estate) pays up to 85% of "lost rent" for anywhere from 6 months to a year. Therefore, the property generally (though not always) remains classified as a rental during the period it was unoccupied since the insurance company was paying rent for that property while it was not occupied. I doubt however, that your renters would be required to vacate for hail damage.
