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Returning Member

Is an insurance payout on a rental property taxable?

Hello

I have a rental property that had  a casualty (fire). The property has always been a rental property.

The insurance payout was $100,000

I have decided not to make repairs but to sell the property "as is". 

 

If I sell the property "as is" is the insurance payout classed as income since I didn't use for repairs?

 

The adjusted cost basis of the property is $70,000.   If I sell for $130,000 the capital gains will be $60,000. Correct?

 

3 Replies
Level 6

Is an insurance payout on a rental property taxable?

Your insurance payout is taxable to the extent the amount is greater than your adjusted basis and there will be depreciation recapture.....recommend you see a tax pro.

Level 15

Is an insurance payout on a rental property taxable?


@NGNJ wrote:

Hello

I have a rental property that had  a casualty (fire). The property has always been a rental property.

The insurance payout was $100,000

I have decided not to make repairs but to sell the property "as is". 

 

If I sell the property "as is" is the insurance payout classed as income since I didn't use for repairs?

 

The adjusted cost basis of the property is $70,000.   If I sell for $130,000 the capital gains will be $60,000. Correct?

 


The insurance payout reduces your cost basis.  If you made repairs, that would increase your cost basis.  Since you are selling as-is, this is what happens.

 

a. You receive the $100,000 payout.  This reduces your cost basis to zero, and the remaining $30,000 of the payment is taxable income (at ordinary income tax rates)

b. Then you sell the property for $130,000.  The entire $130,000 is capital gains.  Some is taxed as depreciation recapture (ordinary income tax rate capped at 25%) and the rest is a long term capital gain.

 

You don't say what your original cost basis was so I can't tell you what your recapture will be. 

 

You may want to see a professional this year.

 

 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 15

Is an insurance payout on a rental property taxable?

Income of any type received from any source for residential rental real estate is reportable income. It's taxable to the extent it exceeds your cost basis.

If you will be rebuilding, then the payout amount is included in the total of all rental income received for the tax year you received the payout. Your casualty loss due to the fire will "NOT" be dealt with anywhere on the SCH E. It gets dealt with under the Deductions & Credits tab in the Thefts and Casualty section. If this applies to you, then when working it through the casualty section of the program *CLICK ON AND READ THE CLICKABLE ITEMS". If you do not, chances are you will enter incorrect figures which will have a high probability of getting you audited down the road.

Understand that when working this through the casualty section, your cost basis DOES NOT include the cost of the land. That's because your insurance DOES NOT insure the land. So in the casualty section where it asks what you paid for your loss, the amount you enter will be what you allocated to the structure, plus the cost of any property improvements you may have listed in the assets section, *MINUS* the total amount of depreciation taken on all listed assets. In the end, the fact remains that you still have full ownership and physical possession along with all rights to the land. Your cost basis for the land DOES NOT CHANGE, as land is not an insurable or depreciable asset when it comes to rental property.

 

 If you will not be rebuilding, but instead will be selling the property "as is" then the payout is reported as income received for the sale of the STRUCTURE ONLY. In this scenario, the fact is. you sold the property to the insurance company for the payout amount. But there's a catch here that is extremely important to understand.

The insurance only insured the structure. Insurance DOES NOT cover the land. Therefore, you only sold the structure to the insurance company for whatever amount the payout was. YOU STILL OWN THE LAND and will continue to own it until you take physical action to sell it or dispose of it in some other way.

If you sell the property "as is" and close on the sale in 2020, then you can just report a single sale on your 2020 tax return which you will complete next year. Otherwise, if you don't close on the sale in the same tax year as the insurance payout, you will need to split the property in the assets section with one entry for the structure only, and the other entry for the land only. Then report the sale of the structure.With this scenario, there is nothing reported in the Thefts and Casualty section since you "sold" the property/structure to the insurance company, instead of rebuilding.

If you're rebuilding, then let me know because there's quite a bit I have not covered for that scenario. (Like the proper disposal of the destroyed asset in the Assets/Depreciation section of the SCH E)

 

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