I have a rental property that was destroyed by fire. I have some questions regarding casualty loss, the insurance payout tax treatment and its impact on 1031 exchange:
1. I understand that if I take the insurance payout and don't rebuild, the payout is taxable unless I replace the property within a certain period of time.
Is the whole payout amount taxable or just the gain (payout - adjusted building tax basis + carried over unallowed loss)?
Is the gain treated as capital gain or ordinary income?
Is there depreciation recapture?
If my marginal tax bracket is 10%, is the recapture rate 10% or still 25%?
Is personal property loss payment part of the equation?
Is fair rent loss payment part of the equation?
Does the replacement time window end 2 years after the end of the year I take the first payment? If I take payment in 2024, I have until December 2026 to replace the property to avoid tax?
I read somewhere the time window was changed to 3 years by the JOBS Act. Is it true?
What kind of replacement property can I buy? I understand it doesn't have the same rules as the 1031 exchange like kind exchange. The destroyed property is a single family rental property. Do I have to buy another single family rental? Can I buy multiple less expensive ones? Can I buy a business?
What do I need to do when filing taxes next year to opt into this? I will not buy the replacement in the same year the payout happened.
2. If the insurance payout is less than the cost to rebuild number provided by the adjuster, can I claim casualty loss when filing taxes next year?
3. If I sell the land and the building as-is later, is the land and as-is building sale part of the involuntary conversion or not? It is caused by the destruction of the building. If it can be considered part of the involuntary conversion, I have more time to find a replacement than the 1031 exchange.
If it is not part of the involuntary conversion sale, the gain of the land portion will be land sale - adjusted land tax basis?
If in #1, the whole amount is taxable, then the building tax basis also gets subtracted here and depreciation recapture happens here?
4. If the land and as-is building sale is not part of the involuntary conversion and I do 1031 exchange, do I only have to invest the gain from the land sale to avoid capital gain tax on this sale?
5. If the total gain is less than the gain I would have gotten if the fire didn't happen, can I claim a casualty loss when filing taxes next year?
6. I have a mortgage on the property. If I pay off the mortgage with the insurance payout and do a 1031 exchange with no new mortgage, I think under normal 1031 exchange rules, the old mortgage amount is considered boot and I have to pay tax on it. But in this case, do I have a boot?
7. Any suggestions on the best approach to take in this scenario to avoid a big tax hit?
Thank you.
