Insurance check

[carroll-j-1]

I received an insurance check in 2020 for hail damage to my commercial rental building. I have not been able to line up a contractor for the repair as yet. Do I have to take the insurance check amount as profit for 2020? I am still trying to line up a contractor but am not having success as yet.

[Carl]

Yes, it's profit. Even if you lined up the contractor and paid them in 2020, it's still profit. What you pay for the new roof just adds to the cost-basis of the structure and gets depreciated over the next 40 years. Depreciation doesn't start until the date/year you place the new asset "in service" as a business asset. So what you pay in taxes on it in 2020, you'll get back (in a sense) over the next 40 years as you depreciate the new roof.

[carroll-j-1]

Thanks. I was thinking since I was repairing storm damage it would be deductable but I now see it improves the property for a number of years and must be depreciated.

[ToddL99]

Your insurance settlement is not taxable income - it is compensation for hail damages that you will have to repair to make yourself "whole"

Since it is not income, you won't get to depreciate or deduct the cost of the repairs - at least up to the amount of the settlement. Any repair costs exceeding the settlement amount may be deducted (or added to the cost basis of the building and depreciated). 

From Do I Have to Pay Taxes on My Insurance Settlement?:

Money you receive as part of an insurance claim or settlement is typically not taxed. The IRS only levies taxes on income, which is money or payment received that results in you having more wealth than you did before.

Because the purpose of insurance is to "make you whole", you should generally only receive enough payment to bring you back to the state you were in before an incident occurred. You might receive a substantial payout from an insurer to fix your car, but if the money is only used to make you whole, it wouldn't be taxable.

[Carl]

Your insurance settlement is not taxable income

That statement can be misleading. The insurance payout for business property (which is what rental property is) is reportable on the tax return. The taxability of that payout is another matter. For example, IRS Publication 527 page 8 states, "You must decrease the basis of your property by any items that represent a return of your cost. These include the fol-lowing.•Insurance or other payment you receive as the result of a casualty or theft loss. •Casualty loss not covered by insurance for which you took a deduction."

There are numerous ways to handle this on the tax return. I find the easiest way is to report it as part of the rental income. Then the taxability of that payout will be offset by the repairs or restoration that was paid for with it.

[jooltime]

What if you accept the insurance settlement but don't repair or replace the property? My mother's home sustained major damage in a flood, but she had just moved into an assisted living facility. We are not going to repair or replace the property. Is the settlement taxable?

[Carl]

Typically, an insurance payout for "personal use" property is not taxable or reportable. But did you get some type of tax reporting document from the insurance company maybe?

The fact that you did not use the money for it's intended purpose "may" make it taxable.