I had a rental property with hail damage last year. Insurance check was received and part of work was done, for less than insurance so far. How do I report this? Thanks

[obrienproperties]

Roof was replaced, still need to finish work on gutters.  Total work to be done will be roughly same amount as insurance check received, but check was cashed in 2019 and some work will be done in 2020.

[ColeenD3]

If the amount you receive in insurance or other reimbursement is more than the cost or other basis of the property, you have a gain. If you have a gain, you may have to pay tax on it, or you may be able to postpone the gain.

How To Postpone a Gain

You postpone reporting your gain from a casualty or theft by reporting your choice on your tax return for the year you have the gain. You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain. If a partnership or a corporation owns the stolen or destroyed property, only the partnership or corporation can choose to postpone reporting the gain.

Required statement.

You should attach a statement to your return for the year you have the gain.

This statement should include the following.

• The date and details of the casualty or theft.

• The insurance or other reimbursement you received from the casualty or theft.

• How you figured the gain.

Replacement property acquired before return filed.

If you acquire replacement property before you file your return for the year you have the gain, your statement also should include detailed information about all of the following.

• The replacement property.

• The postponed gain.

• The basis adjustment that reflects the postponed gain

• Any gain you are reporting as income.

Replacement property acquired after return filed.

If you intend to acquire replacement property after you file your return for the year in which you have the gain, your statement also should state that you are choosing to replace the property within the required replacement period. You should then attach another statement to your return for the year in which you acquire the replacement property. This statement should contain detailed information on the replacement property. If you acquire part of your replacement property in one year and part in another year, you must make a statement for each year. The statement should contain detailed information on the replacement property acquired in that year.

Pub. 547.

[esangalang]

Thanks. 

You confirmed my research. I am using Pub 547.

[Carl]

I don't know why some folks go around their elbow to get to their thumb. The simplicity of this is staggering, and the IRS pubs seem to go to great lengths to complicate it as much as possible.

All income for a rental property received from any and all sources is reported as rental income. This includes an insurance payout. The payout is reportable as taxable rental income (initially) because what you paid for that insurance was a deductible rental expense. Therefore the payout is reportable rental income.

Additionally, practically all rental dwelling insurance policies include an amount for "lost rents" up to 85% of the rent that was not paid because the property was not habitable. So if you were paid for say, 3 months of lost rent, that basically means the insurance company was renting the structure from you for that period of time. So that time it was empty counts as "days rented" in the days rented count if you were asked for that. 

So if you had a paying renter in the property for the entire tax year except for the time it was being returned to a habitable condition, and the insurance company paid you rent for that period of time, that means the property was rented for the entire year. Every single day.

The taxability of that total entire payout is offset by the qualified rental expenses it was used to pay for. 

In your case, it's not a deduction "per-se" because your new roof and gutters are not rental expenses. They are property improvements that add to your cost basis (which is exactly what you want). They get capitalized and depreciated over time.

Your new roof and gutters will be classified as residential rental real estate and depreciated over 27.5 years. Depreciation starts when the asset is placed "in service". That date is usually no more than one day after the work is completed. Doesn't matter if there's a renter in the property or not either. Once the property is "move in ready" then it's in service and depreciation starts on that date.