If a rental house is destroyed by tornado then rebuilt with insurance proceeds and some taxpayer contributions, what is the basis when it is sold?

[txrands84]

Taxpayer inherited house in 2009 and rented it using a basis as the fair market value of $135k less $20k land for depreciation. The house was destroyed by tornado in 2014, and he claimed a capitol loss of $18k, considering depreciation and insurance. Then in 2016 he rebuilt and sold the house for $204. What is the basis for this new house?

[Coleen3 · Accepted solution]

Basis adjustments can increase and decrease the value of property. Starting with the FMV as inherited property, the loss you took of $18k would reduce the basis by that amount. The money you spent to improve the house would add to the basis. The difference between that figure and the sales price would be your gain or loss. The depreciation will also have to be recaptured.

[txrands84]

Was the depreciation recaptured when the loss was claimed?

[Coleen3]

No, depreciation is not figured into a loss. It is a wash anyway. Both the casualty and depreciation lower the basis. So whether you call it a loss or you call it depreciation, you have in a sense gained tax-wise by that amount and now "pay it back" in the form of a basis adjustment.

[txrands84]

Thank you for Table 1. It says increase to basis for "Casualty loss: Restoring Damaged Property". Can you help me understand this?

[Coleen3]

Orig basis $135-$18k casualty loss taken=new basis of $117+ dollar amount of "rebuilt house"= adjusted basis.

[txrands84]

The rebuild was paid by insurance, and maybe some taxpayer contributions. This makes a huge difference, indicating a loss instead of the taxable gain I'm trying to reduce. It seems wrong to claim cost that did not come from his pocket.

Do I also decrease the &117 by the depreciation on $17K to $100K? Then add $119K for the insurance we used to claim the $18K loss for $219K? Wow! What a difference. Do I understand this correctly?

[Coleen3]

I'm getting a little lost. Yes to decrease to $100k. Yes, decrease by $18k more. So, you got an insurance payment for $219k and used the entire amount to rebuild? If so, those two are a wash. The person who gifted you money is irrelevant. Was additional money over and above the $219k that you used to rebuild? If so, add that to the basis.

[txrands84]

Thank you so much for your help.

Rental House
$135K Original basis
$18K Less capital loss 2013
$17K Less accumulated depreciation in prior years
$119k Plus???? Insurance proceeds used to calculate loss
$???  Plus maybe some taxpayer contributions (I have to get this info later)

[Coleen3]

First two reduce basis. (17 and 18) $119 reduces basis (insurance) and then increases basis (rebuild) so they cancel each other out. ??? IF those contributions went back into the house and not in your pocket, then increase the basis.

[Davewave]

Hello, can you direct me to the best place to ask this question?

A personal residence is destroyed completely in a tornado and it was in a "declared disaster area"

The original cost of the home was $165,650 - $27,500 land = $138,150K,  a Home office in the home was taken for years, 33.33 percent.

So, House was around $92105(66.66%), and the home office was $46,045 (33.33 percent)

Cost or adjusted basis of Home office= $46,045 minus dep allowed or allowable $21,724 = $24,321

Cost or Adjusted basis of Home $92,105

I tried using "Schedule 20. Home (excluding contents)

Value of home before tornado on date of Tornado was $400,000 

The insurance paid out 400, 000.

The home was rebuilt for $450K and on the same LAND for $450,000.   So, they spent more on the rebuild.

How do you postpone or transfer and gain on the business portion of the home? 

Turbotax does not seem to explain how to compute this and what exactly to do.   I thought it said, it could all be forwarded to the new house, meaning, any "gain" of any kind on the sale of the home, If there was one. 

Since there was a "gain" of the Home used for personal use, and for the "office in the home" part.

- I tried using pub 584 and the worksheets, but I went off track somewhere, (I say with a smile).

I read somewhere any gain gets added to the next home but, I am not sure how to show it or do it. 

Can you  

[Carl]

Sounds like the conversation is getting a bit complicated, when it may not need to.

Here's an example of just one way to handle this. There are other ways, but the bottom line will be the same in the end.  I define "the end" as being when you sell or otherwise dispose of the property.

Original cost basis of property: $100,000

That original cost basis is divided $30K to the land and $70K to the structure.

In 2020 a tornado completely destroys the structure.

Understand that this does not affect the $30K cost basis of the land in any way, shape form or fashion. Additionally, while the insurance company may declare it a "total loss", that is only true for the insurance company. The insurance does not insure the land. It only insures the structure. Therefore, it is not a total loss for *you*. Technically, you still have 30K of value left in the land.

At the time of destruction you have already taken $30K of depreciation on the property. So you have a $40K loss on the structure. That $40K gets added to the cost basis of the land. That raises your cost basis in the land from $30K to 70K.

Now the Insurance company pays out $100K for you to rebuild with, and you do "in fact" rebuild a new structure on the land at a cost of $100K. That 100K is taxable income to you and gets claimed/reported on your tax return as rental income. Then you show this property as disposed of in the Assets/Depreciation section with the date of disposal being the date of the destruction.  As you work it through the assets/depreciation section you will not show that you sold the property. When presented the screen for "Special Handling Required" just click YES and press on. (You'll see one of the reasons on that screen for special handling deals with it's destruction.) That way, you're not asked for any sales information.  Doing this for all assets (if more than the property itself is listed) will show the IRS a complete disposition of the property that did not involve a sale.

Next, you will enter an entirely new property with a cost basis of $170K (using my figures above) with $70K allocated to the land, and $100K allocated to the structure. The "in service" date will be the first day a renter "could" have moved in to the new contruction, which is normally the day the property is available for rent.

Depreciation starts on that date all over from year 1 of the next 27.5 years.

Now there are other ways to do this. But in my eyes this is the simplest. You may consider other ways simpler, and that's fine. But in the end, the results will be the same. It's the end result that matters more so than the path you take to get there.