Would it be easier to only "sell" this complete property and say the sale value was the insurance reimbursement plus the land sale and use the full land and depreciated structure value as the cost basis?
I don't see why not. But then, you'd have to delete everything from the Casualty/Thefts section.
Typically for someone in your situation, provided everything from the date of the fire to the closing on the sale, occurs in the same tax year, your suggested method would work just fine and I can't think of anything that would raise any flags. That is, unless your state taxes personal income. The state is going to become aware at some point (if they haven't already) that there's a tax basis change in the property because of the fire. So I would not use the above method you suggest, if your state taxes personal income. Remember, you're reporting the sale of the entire property. The buyer is reporting the purchase of land and "maybe" the purchased of a devalued structure. So the state is going to learn about this rather quickly, I would think. Exactly how the flow of information would work I this, I haven't a clue. I tend to avoid those things I"m clueless on... and least once I'm self-aware that I'm clueless. 🙂
Additionally, if the fire loss and the sale occurred in the same tax year, there's no need to convert the property to personal use before the sale. That's because a portion of your insurance payout is for "loss of rent". A fairly standard part of almost every rental dwelling policy, is a "loss of rent" clause which usually pays up to 85% (or less) of rent income loss due to the casualty, for anywhere from 6 to 12 months. Most common I see is for 6 months. So the fact may be, that your insurance company continued to "rent" the property, for a period of time after the fire. If so, the property remains classified as a rental.
