Investors & landlords

It depends. If you receive compensation for a loss of value of your home and consequently a loss of basis, I opine that this is not taxable because you may pay more of a capital gains tax later because the basis of your property has been reduced by the reduction in cost basis. There is no economic benefit to you.  

Now how to handle the depreciated cost basis. This is a little tricky but this is the way I would do it. When you go to your asset summary screen in your program, you would reduce the cost basis by your $100,000 settlement amount. Let's use a scenario for illustrative purposes.

1. Original cost basis. $400,000. Depreciation over that period of time taken is $400,000/27.5=$14,545
2. Thus depreciation for a nine-year period is $14,545 x 9=$130,905
3. Next I would go to my asset summary page and select edit next to the property
4. I would scroll the next few screens until I reach a screen that says Tell us About This Rental Property.
5. Here I change the cost to $300,000 reflecting the loss of value. Leave the date of sale the same.
6. Scroll through the next screen and after that you should see a screen that says to confirm prior depreciation. Here I will enter $130,905. When you reach this screen, there will be a different amount. You can erase that record your prior depreciation amount.
7. Next screen will be your asset summary and you will see that the new depreciation expense for 2020, which is based from your new cost basis. Our scenario is based off of $300,000. When you get to your asset summary page, be sure to click on the box that says Show details. 
8. I will post an image that illustrates this scenario we have just seen at the end of this post.

Chances are this property will be fully depreciated before 27.5 years have expired but at least when you sell your property, but at least you will have an accurate amount of depreciation taken over the years.

Lastly, you may or may not receive a notice from IRS asking details about the change in cost basis. If so, you will reply back explaining the circumstances in the loss of basis. Also print a copy of this post, which relates to the advice you received from Dave, an esteemed Tax Expert that works for Turbo Tax. This is a situation that doesn't happen often but this is the position I would take and I stand by my decision. 

[Edited 01-27-2021|09:12 PST]