Rental Property Severely Damaged by Fire

[Anonymous]

Ok, I had a rental property which was extensively damaged by a fire in October 2019.  I received lost rental income from my insurance and policy limits on the dwelling (approx $175k).  I decided not to rebuild and ended up selling the home to another person for a nominal ($1k) amount just to get rid of it.   I then purchased another property at a different location with part of the proceeds but it still left approx $100k from insurance proceeds. 

Here are my questions.  Is the remaining $100k reportable as a gain on my 2019 income taxes minus the basis of the home that had the fire?   Is the "basis" just what I paid for the home not including improvements made to it while used as a rental?   TT uses the term "cost basis" not "adjusted basis" during the interview portion which is why I'm confused.  Lastly, my understanding is that I have two years from the year I received insurance reimbursement to purchase replacement property.   If I intend to do that, do I simply report receiving "0" insurance proceeds on my 2019 tax return?  The TT program does not seem to clearly indicate how to handle this situation.  If I end up not making a purchase within the two years would I need to amend my 2019 return to reflect the insurance proceeds received?   Thanks in advance for any help you can provide.   

[Carl]

So lets start from the beginning. First, understand that in your specific case, since you did not rebuild, what you did with the payout *does* *not* *matter* one iota.

In the past, the insurance premiums you paid on the policy each year for that rental property were a tax deductible rental expense.

Therefore, all income received for that rental property from any source for any reason (including the entire insurance payout) is included in the total rental income received in the tax year. Every single penny of it. There is no separation of the payout amount declared for "lost rents". The taxability of that income may (or may not) be offset by what you do with that money. In your case, since you did not rebuild or repair, not a single penny is offset. *AT* *THIS* *POINT* *IN* *TIME*.  It's reportable rental income. Period. End of Story. But all hope is not lost.

Before I can continue I need to know if the structure was declared a total loss by the insurance company, and is therefore totally and completely uninhabitable. Hopefully, yes. It makes dealing with this in TurboTax that much easier.

[Anonymous]

that $175,000 needs to be broken down between lost rents (which would be 2019 income) and property damage.  

since you did not repair the building the portion for property damage could be treated as a reduction to the cost of the billing (as long as the net basis isn't reduced below 0).  then you can report the sale for $10k and use the reduced basis for figuring gain or loss.

alternative is to include the property damage proceeds in the sales price

for tax purposes - no depreciation should be taken for the period it could not be rented due to the fire.

thus either way you should end up with the same gain or loss. 

[Anonymous]

I should have clarified in my original post.  I received approximately $8000 in lost rent for the time that it was estimated it would take to rebuild.  Structure was severly damaged and insurance ended paying out policy limits $175k.  I know the $8k received for loss rent has to be reported as rental income but I've never heard of the insurance reimbursement on a casualty claim being treated as income.  My understanding is that it essentially works as if I sold the property and received $175k for it and the portion above my "basis" is treated as a gain unless i buy like kind property within two years.  I was just wanting to confirm that and if anyone knows how that is handled in turbo tax.   

[Carl]

insurance ended paying out policy limits $175k

That would mean the insurance company declared the structure a total loss. But a total loss for the insurance company is not a total loss for you, by any stretch.

My understanding is that it essentially works as if I sold the property and received $175k for it

Your understanding is incomplete. Remember, the insurance company *does not* insure land. Not one single penny of your insurance payout is for the land. Your name still remained on the property deed after the payout with no ownership changes what-so-ever. So if you treat it as sold (and you can) then that insurance payout for the sale of the structure *only*. Not the land.

Therefore, if you maintain the original cost basis, your sale price is the insurance payout (minus that designated as lost rent, which is included as rental income) plus whatever you sold it to a third party for.

unless i buy like kind property within two years.

No longer true. That reinvestment option expired and died back in the 2008-2010 time frame. What you do with the proceeds from the sale does not matter and makes no difference that the gain is taxable, and you will pay taxes on it.

If the "sold it" route is the way you want to go with this, that actually makes it easier on the tax front. But I don't know if it helps or hurts since comparing it to other scenarios is a waste of time at this point, since you've already sold the property and no longer own it.