On Schedule E, I did not rent my residential rental in 2024 due to a federally declared wildfire natural disaster, which completely destroyed my rental property in 2023. I plan to rebuild this rental property and am still in the architectural design and permitting process now in 2025. I have carryforward losses from previous years for this rental property. I still have expenses in 2024 for mortgage interest and (reduced) insurance coverage. I was planning to file my taxes showing $0 rental income in 2024, 0 days available for rent, 0 days personal use, the ~$18,000 mortgage interest and ~$300 insurance expenses, and $0 depreciation expense because all assets were completely destroyed by the fire, so there's nothing left to depreciate. I have other rental properties, some with gains some with losses, and some with carryforward losses from previous years, as well. If I do this, TT will apply the carryforward losses from this property, and the other properties, proportionately as it does in normal years. Is this allowed by the IRS? Or, do I have to remove this property from Schedule E in 2024 and put it back in service in the future (say by 2026?) when the rebuild in complete and the property is available for rent again? If that is the case, can I deduct my 2024 and 2025 mortgage interest and insurance expenses in 2026? And can I reinstate my carryforward losses for this property from 2023 at that time in 2026?
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Since the residence was destroyed, you can claim no further depreciation or expenses. The IRS rules for vacant or idle property apply only if the rental asset itself is still available to be rented. Essentially, your rental business ended when the property was destroyed.
You can claim the mortgage interest and any property taxes as itemized deductions.
Or you have the option to capitalize the mortgage interest, property taxes and insurance as construction costs for the new residence. See this article from The Tax Adviser (an authoritative source) regarding the election to capitalize: Elective capitalization as a TCJA planning tool.
You may wish to consult a local tax expert for advice on the best course of action in your particular tax situation.
You will need to report that you disposed of this rental activity on your tax return. When you do this, TurboTax will delete all forms and schedules related to this property.
Also, all passive losses will be released to be used to offset passive gains on your return. Any unused passive losses will carryover. You'll need to keep good records on this so you can re-enter any carryover losses that aren't transferred to future returns.
When the reconstruction is complete, you can report a new rental property.
Ok, thank you. I will respond in the TT interview "I (sold or) disposed of this property in 2024" and then deal with the question of capitalization of my carrying costs in the future year when I put a newly rebuilt rental in service on my currently vacant lot. Thanks again.
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