Insurance claim for hail damage to rental property

[waterpistol]

I have a rental property that sustained hail damage and I filed insurance claim. The claim covers the roof, fence and inside ceiling/wall damage. I received insurance payment minus the deductible and less the "holdback" pending sending proof for all repairs being done.  For illustration purposes the total claim was $25K and I received payout of $20K. $2K was subtracted for deductible and $3K held back for the recoverable depreciation portion. The roof and fence were replaced but the remaining repairs have not been made yet and won't be until next tax year. I am fighting with insurance company over value of all repairs and we have not yet reached settlement.  How do I handle the repairs that were made (incurred $18K cost) in relation to the insurance payout received so far ($20K)? Since the insurance payout covers multiple repairs do I compare item by item or total cost vs total payout? In tax year 2020 I have more insurance payout  than cost incurred as not all repairs are done but when looking at the itemization of the insurance payout, my costs are not covered, hence why I am fighting over the claim amount.  Normally I would declare the fence and roof as assets and depreciate over time vs expense the cost. But the insurance claim and status of all repairs is muddying the picture for me.

[Carl]

When it comes to rental property, all income received from all sources for any reason (including an insurance payout) is included in the rental income section in the tax year it is received. It gets offset by the cost of the things it's used to pay for. Repairs are then claimed as repair expenses, and property improvements are entered in the assets/depreciation section and depreciated over time.

For example, if the entire roof was re shingled/replaced, that's a property improvement. The cost of that is entered in the assets/depreciation section and depreciated over the next 27.5 years.

If you had to replace a few sheets of sheet rock in the house, then that would be a repair expenses. Whereas if you had to replace a major portion of sheet rock throughout the house, that would be a property improvement.

[waterpistol]

Thank You. Sounds like I treat the insurance claim as one lump sum and disregard the details of how much was allocated for each repair item.  For 2020 the insurance claim will reflect as additional income as I didn't have all repairs completed even though the amount allocated for the roof was lower than the cost incurred. When I do have last repairs done in following tax year, that will be all cost incurred with no insurance payment as it was all paid in 2020.  I am fighting with insurance company so I guess will see how things play out for next tax year.  I wasn't sure if the right thing to do is to claim the insurance payout as income and also claim the repair of cost incurred or to just deduct the amount insurance paid against the replaced roof ($15K for roof vs $4K for roof)? Does make a difference here as the roof is depreciated over time.

[Carl]

I wasn't sure if the right thing to do is to claim the insurance payout as income and also claim the repair of cost incurred or to just deduct the amount insurance paid against the replaced roof ($15K for roof vs $4K for roof)? Does make a difference here as the roof is depreciated over time.

The insurance payout is claimed/reported as rental income in the tax year you receive it. Period. So if you only received a partial payout in 2020, then that's all you report on the 2020 tax return. Now "on paper" as far as taxes are concerned, this has nothing to do with your repair and property improvement costs. Rental income is rental income, regardless of where it comes from and/or who or what entity pays it.

Your repair costs are claimed as such in the tax year you actually pay those costs.

Your property improvement costs (such as the new roof) are claimed/reported in the tax year the property improvement is completed and actually placed "in service" as a rental asset. Typically, if the property is already classified as a rental, your new roof will be placed in service either the day of completion, or one day after the work is completed.

Now depending on where the property is and the laws of the state or county that property is in, you may be required to get a CO (Certificate of Occupancy) once the work is completed. The contractor usually takes care of this and doesn't bother you with the details. This is not common for something like a new roof. But the requirement for a CO may exist in some locales for all I know. In that case, the property improvement can not be placed in service until the date the CO is issued.  If such a requirement exists in your locale, the contractor typically provides you the CO when they present you the final bill.