@Carl
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.
>> This is true if the basis of the property before casualty is less than insurance payout. In that case you have a gain.
In my case, the basis of the property is more than the insurance payout. Hence, I would reduce the property basis. Refer here for section "How To Report Gains and Losses" and here for section "Decreases to Basis"
