First I am not a tax expert, but I have now done considerable research on this. It looks like the proper way to report this is under Deductions, Casualties and Thefts, which ultimately fills out form 4684. Going through the steps allows you to show the building and contents destroyed, reclaim you depreciation on building and contents using your adjusted basis, and then place a value on what is left (the land). Since my insurance payout was higher than the adjusted basis, it gave me a capital gain (like selling the building and contents, but not the land). If I sell the land later, I will also have to report any gain on that using the land cost (since it was never depreciated) as the basis. In addition, if you think you may replace the building at some point in the future, this gives you the option of deferring any capital gains for a period of time (Up to two years I believe).
