How to Enter Depreciation Recapture in TurboTax upon grease fire and subsequent demolition

[cestmoijay]

[Rental Investment Use only - no primary home basis] - using TurboTax Premier Windows Desktop

So, here's the sequence of events:

Oct 2021 - Grease fire caused by tenants

Dec 2021 - Insurance payout for renovations and 4 mths of "Loss of Use"

Mar 2022 - Demolition of house

I will be just keeping the land and no longer rent it out.

I have added the 4 months of Loss of Use to my rental revenue and deducted that from the Insurance totals (as I was advised by Insurance adjustor - the Insurance company was supposed to send over a tax form 1099(?) but I never received it as of yet).

How do I enter the recapture of the house in this case?  In Schedule E?

thx!

[JulieS]

Yes, that would be reported in the rental section of TurboTax. 

1. In the Asset section of the rental interview, select Edit for the building. 
2. On the screen, Tell Us More About This Rental Asset, select This asset was sold, retired, stolen, destroyed, etc. 
3. In the date box that pops up, enter the date of the fire. 
4. Continue through the section.
5. When you get to the sale information, your "sales price" will be the amount of the insurance that was for renovations. 
6. If you have other assets for this property, report them disposed of in the same way (except the land).

[cestmoijay]

Hi Sorry, I don't see "Asset" as I clicked on "I'll choose what to enter"... I only see relevant section called "Rental Properties and Royalties" where it doesn't even ask me if I have disposed of the property.

[Carl]

Here's how this works, since you decided not to rebuild or restore with the insurance payout.

The insurance payout (all of it) is included in the rental income.

There is no "recapture" of depreciation taken. It's the opposite. You get to claim the remaining depreciation to be taken as a loss (sort-of, as you won't see that loss right away).

Whatever amount is left to be depreciated on the structure gets added to the cost basis of the land. Additionally, your demo costs get added to the land.

So more than likely, when you sell the land you'll be selling it at a loss, and if you sell it soon it will be a deductible business or investment loss.

[cestmoijay]

Oh wow!  So instead of a small refund, I would get a big 25k tax owing?  I consulted a CPA and she said that I have to treat the house portion as "sold" and use the proceeds of the insurance (minus the Loss of Use) as the sale price.  I would then use the Loss of Use portion 4 months and include that as rental income.  

[Carl]

she said that I have to treat the house portion as "sold" and use the proceeds of the insurance (minus the Loss of Use) as the sale price. I would then use the Loss of Use portion 4 months and include that as rental income.

Yes, that's another way to do it. You sold the structure only to the insurance company for the amount of the insurance payout. Problem is, how are you going to show "ONLY" the structure sold? 

Now if it was a case where you sold the land in the same tax year you sold the structure, this would not be an issue. But if you still owned the land after Dec 31, 2021, you have quite a lot of manual work to do. It's prone to quite a lot of potential user error also.