Basis adjustment for delayed repairs of casualty loss of rental property

[investor85]

I have a rental property with $200,000 basis. I had a casualty loss (Hail) on Dec 01, 2021 partly covered by insurance.
Roof was replaced and exterior components like AC, window screens and garage door were repaired.
Total loss is 30k out which insurance paid 22k. My out of pocket deductible was 8k.

I hired a contractor to do the repairs and they completed all repairs on Jan 10, 2022 after which I paid them $30k.

Should I claim the casualty loss in 2021?
What is the basis adjustment to property in 2021?
What is the basis adjustment to property in 2022?

[ThomasM125]

You would claim the loss in the year is was sustained, so on your 2021 tax return in this case.

The basis in the property is first reduced by the fair market value of the property immediately before the casualty, less the fair market value just after the casualty occurred. I believe that is $30,000 in this case. It is then increased by the amount of insurance proceeds received, or $22,000 in this case. So, the adjusted basis would be $200,000 - $30,000 + $22,000 which leaves an adjusted basis of $192,000. So, the loss of $8,000 that you sustained reduces the original basis to $192,000.

The basis at the end of 2021 and in 2022 would be the same, $192,000. 

[Carl]

Another thing to keep in mind also. Rental income from all sources for any reason (including the insurance payout) is reported and included in the rental income received for the year. So if you received the payout in 2021, that gets added to your total rental income for the 2021 tax year.

You will not deal with the contractor payments you made in 2022 until you do your 2022 tax return next year. That's when you'll add the property improvements in the assets/depreciation section with an in service date of Jan 10, 2022 or after.

[investor85]

@ThomasM125 I disagree with you as follows:

You would claim the loss in the year is was sustained, so on your 2021 tax return in this case.
>> Agreed

2021 Tax return:
As for the reduction in basis, it would go down from $200,000 - $30,000 = $170k
One would never add the insurance payout back in the basis unless it is used to restore the property.
However, the deductible casualty loss for the year would only be $30k-$22k = $8k

2022 Tax return:

After paying the $30k to the contractor to complete the restoration, I would increase the basis for property from $170k to $200K

[investor85]

@Carl
Another thing to keep in mind also. Rental income from all sources for any reason (including the insurance payout) is reported and included in the rental income received for the year. So if you received the payout in 2021, that gets added to your total rental income for the 2021 tax year.
>> Disagree. The insurance payout for a casualty loss is subtracted from the total casualty loss to calculate the deductible loss (Assuming the total loss is less than the basis of the property). In my case, the deductible casualty loss will be $30k - $22k = $8k. The $22k insurance payment is not income and will not be reported as such.

You will not deal with the contractor payments you made in 2022 until you do your 2022 tax return next year.
>> Agreed

That's when you'll add the property improvements in the assets/depreciation section with an in service date of Jan 10, 2022 or after.
>> I am not sure about this.
Should the restoration from the casualty loss not be added back into the basis that was reduced earlier? In my case, increasing the basis back to $200k.
Why create a separate asset with a new service date?

[Mike9241]

I agree with your conclusions. the taxpayer is only out of pocket $8,000 for which a loss is being taken. so there should be no effect on the tax basis of the property

[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.

[investor85]

@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"