Sounds like the conversation is getting a bit complicated, when it may not need to.
Here's an example of just one way to handle this. There are other ways, but the bottom line will be the same in the end. I define "the end" as being when you sell or otherwise dispose of the property.
Original cost basis of property: $100,000
That original cost basis is divided $30K to the land and $70K to the structure.
In 2020 a tornado completely destroys the structure.
Understand that this does not affect the $30K cost basis of the land in any way, shape form or fashion. Additionally, while the insurance company may declare it a "total loss", that is only true for the insurance company. The insurance does not insure the land. It only insures the structure. Therefore, it is not a total loss for *you*. Technically, you still have 30K of value left in the land.
At the time of destruction you have already taken $30K of depreciation on the property. So you have a $40K loss on the structure. That $40K gets added to the cost basis of the land. That raises your cost basis in the land from $30K to 70K.
Now the Insurance company pays out $100K for you to rebuild with, and you do "in fact" rebuild a new structure on the land at a cost of $100K. That 100K is taxable income to you and gets claimed/reported on your tax return as rental income. Then you show this property as disposed of in the Assets/Depreciation section with the date of disposal being the date of the destruction. As you work it through the assets/depreciation section you will not show that you sold the property. When presented the screen for "Special Handling Required" just click YES and press on. (You'll see one of the reasons on that screen for special handling deals with it's destruction.) That way, you're not asked for any sales information. Doing this for all assets (if more than the property itself is listed) will show the IRS a complete disposition of the property that did not involve a sale.
Next, you will enter an entirely new property with a cost basis of $170K (using my figures above) with $70K allocated to the land, and $100K allocated to the structure. The "in service" date will be the first day a renter "could" have moved in to the new contruction, which is normally the day the property is available for rent.
Depreciation starts on that date all over from year 1 of the next 27.5 years.
Now there are other ways to do this. But in my eyes this is the simplest. You may consider other ways simpler, and that's fine. But in the end, the results will be the same. It's the end result that matters more so than the path you take to get there.
