Your insurance settlement is not taxable income
That statement can be misleading. The insurance payout for business property (which is what rental property is) is reportable on the tax return. The taxability of that payout is another matter. For example, IRS Publication 527 page 8 states, "You must decrease the basis of your property by any items that represent a return of your cost. These include the fol-lowing.•Insurance or other payment you receive as the result of a casualty or theft loss. •Casualty loss not covered by insurance for which you took a deduction."
There are numerous ways to handle this on the tax return. I find the easiest way is to report it as part of the rental income. Then the taxability of that payout will be offset by the repairs or restoration that was paid for with it.
