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Report it as rent on the Sch E then the expenses to make the repairs are also taken on the Sch E ... that is how they get offset.
but OP says they didn't make repairs so there is no offset
All income received for rental property from any source for any reason (including an insurance payout) is included in rental income. How it's offset depends on what that money is used for. If it's used for something classified as a repair to that rental property, then it's a repair expense and is deducted as such.
If it's used for something classified as a property improvement (as is most likely your case) then it's entered as a property improvement in the assets/depreciation section and gets depreciated over 27.5 years.
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