damage beyond repair on rental

[jbwil]

I have a rental that was damaged to the point of tear down and garbage left on the property during covid.

It was in litigation for 3 years due to the timing. I was unable to collect rent and had massive expenses in legal fees, and clean up costs for these years.

I have had this rental since 2007, but was unable to claim it as a rental since 2020 as I had no income on it.

I have deducted the attorney fees, but can I deduct a loss of rents or do the expenses and depreciation just get added later when it is rebuilt enough to rent it out again?

Also, if it had been a part of an enterprise with our other two rentals, instead of taking safe harbor independently for each rental, would it have made a difference in how it was dealt with? 

[PatriciaV]

According to IRS Pub 527 - Vacant Property, you can’t deduct any loss of rental income for the period the property is vacant.

You can, however, continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it isn’t available for rent. (IRS Pub 527 - Idle Property)

Because the property was not available to be rented, any costs for repairs or improvements that you incurred increase the basis of the property and should be entered as a separate Rental Asset (improvements).

The advantage of a real estate enterprise is that the time spent on all rental properties is combined to qualify for QBI. Whether this would have affected your tax situation depends on the specific facts for your rental properties.

[Carl]

I have had this rental since 2007, but was unable to claim it as a rental since 2020 as I had no income on it.

Not having income is no reason for not reporting it on SCH E. You were in litigation, and had you reported it on SCH E it would have been significantly easier and simpler to claim all your legal expenses on said SCH E in each tax year such expenses were incurred. Since you didn't report it on SCH E in 2021, 22 or 23, I'll leave how you claim the legal expenses to others. But for the other stuff:

- Any insurance payout you may have received is reported as income in the tax year you receive it. Why you ask? Because the insurance premiums you paid on the rental property was a deductible rental expense. Now in your case since you stopped reporting on SCH E with 2020 being the last year you did report it on SCH E, I have no idea how you'll deal with any insurance payout received after 2020. But I will "speculate" on that below.

Since you're planning to rebuild, start with the cost basis of the "structure only" from when you started depreciating it back in 2007. Subtract from the cost basis any and all depreciation taken on the structure.
Now add to that amount the cost of demolition, disposal and cleanup of the site. This gives you the amount of your total loss for this event. Add this new total to the cost basis of your "land only", and this increases the cost basis of the land.

At this point, if you were to sell the land then your taxable gain on the sale would be significantly reduced, or your loss would be greater if you sold at a loss.
When you rebuild, the cost of the rebuild is added to your cost basis. Assuming you rent it out after the rebuild, in the TTX program the amount you enter in the "COST" box will be the cost of the new structure, plus the now adjusted cost basis of the land. Then in the "COST OF LAND" box you enter that adjusted cost basis of the land. Depreciation starts over from year one, effective the date you place the property back "in service".
Whew! Hope that makes sense!