It all works out in the wash. You lose $30K to the casualty loss. Then you add it right back with the payout and improvements paid for.
The reason the insurance payout is rental income, is because you got to deduct the insurance premiums from the taxable rental income in the first place. Imagine if you did not rebuild, but instead pocketed the money. It's taxable rental income. You "in essence" sold the damaged portion of the property to the insurance company.
