Rental House Fire

[amycp7]

Hi - I have a rental home that I bought in June of 2015. I lived in it as my primary home and started renting it in February 2017. There was a fire in June of 2019 this year and it was a total loss for the insurance. The insurance is going to pay for the repairs of rebuilding the home and are also paying me for loss of rents. After they finish rebuilding it, I am planning on selling it. How much taxes will I have to pay on it?

FYI: I bought the home for $165,000, I've been adding it to my taxes as a rental and doing the depreciation since I started renting it in 2017. I have no idea how much we are going to sell it for, but my guess based on other homes in the area will be like $220K 

[Critter]

Ok ... there are too many moving pieces to even try to answer that question and the TT program is ill equipped to handle this situation ... so I highly recommend you seek local professional assistance to tax plan for this unique happening and to complete the return later.  

[Carl]

You need to break this down and handle/deal with one item at a time.

1) Reporting the loss.

2) Dealing with the rebuild

3) Whatever you want to do next (sell, lease it out again, whatever.)

So for now, don't bother with items 2 and 3. Just concern yourself with item 1.

Now nothing happens until it's time to file your 2019 tax return. But what you can do if (AND ONLY IF) you have the CD version of TurboTax, you can do some rough figures by pretending the loss happened in 2018.

The first thing you do is back a backup copy of your original .tax2018 file located in the documents/turbotax directory. You*WILL* be making a lot of changes to it. So you need to be able to restore the original file before your start your 2019 tax return. Otherwise, you'll be royally screwed when you import data from he 2018 file into your 2019 taxes.

it was a total loss for the insurance

That statement requires clarification. While it may be a total loss for the insurance company, it is not a total loss for you, any way you look at it. This is because you still have the land. Insurance companies do not insure land. They only insure the structures on that land, and that's it. Therefore it's important to understand that "you" do *Not* have a total loss.

Still with me on this before I continue?

[amycp7]

Yes.

[Carl]

I've attached a word document called Rental Property Fire Loss. You can download it and read it. More than likely you will not be selling the house in 2019 as you can figure at least 6 months to rebuild.

Make sure you understand how the loss rents payment from the insurance company will work, and that you will claim it as rental income received as such, in the year the insurance company makes that specific "loss of rent" payout.

[amycp7]

Thank you! 

[Amjain241114]

I was a tenant and lost everything this September in fire. 

My losses were very large . But my renters insurance covered 8000 only so I just got this amount. How do I report all this and can in anyway I can claim the rest in tax return.

[PaulaM]

@Amjain241114  Unfortunately, most personal casualty loss deductions have been suspended through the tax year 2025. Presently, casualty losses are allowed for losses in federally declared disaster areas. See page 3 of the IRS publication link below.

IRS pub 547

[Carl]

I was a tenant and lost everything this September in fire.

Unfortunately, personal losses are no longer deductible. However, since you got an insurance payout you'll still report it to avoid having to pay taxes on the payout.  In a nutshell:

Depending on your specific situation, the insurance company may send you a 1099-R or 1099-MISC reporting the payout. If they don't send you a tax reporting document of some type, then you have *NOTHING* to report concerning this. But if they do send you something, thenyou are required to report the amount paid to you that is reported on whatever tax reporting document the insurance company sends you.

If you have say, $10K of loss and the insurance pays out $8K, you'll report your $10K loss along with the $8K insurance payout. Then the insurance payout won't be taxed. But you also will not be able to deduct the additional $2K of loss that insurance did not pay for.

Generally, if you paid for the insurance with "before tax" dollars, then the payout is reportable. But if paid with "after tax" dollars, the insurance company won't send you any type of tax reporting document and you don't have to bother with reporting anything.

The above does not apply if you are in a federally declared disaster area, and your losses were caused by and are directly attributed to the disaster.

[bobknjan]

I was a tenant and lost some personal things that was not covered by my insurance.  I also had to live in a temporary apartment for 3 months. I was reimbursed by my insurance but not enough to cover all the rent and living expenses. How do I report all this and can in anyway I can claim the rest in tax return.

[fgrentalproperty]

Hi @Carl , last year I had a fire damage in my rental property and it's a partial damage. Do you happen to have the word document to describe how to file tax return using TT under this partial damage condition?

I searched through the forum and was really glad to read through the doc you attached here. But I found it's for a complete damage case. If you already have the partial damage case summarized, can you share with me? Thanks!

[Carl]

I've never had time to write up for partial damage. Basically, because the writeup would be a lot more complex based on differing levels and types of "partial damage" due to fire.
But basically, you convert the rental property to personal use effective the date of the fire. Then once it's all fixed up and placed back in service you create a "new" rental property. Keep in mind that the value of the land does not change, and since land is not depreciated that's not really a problem. There are several ways to do this. With one way, the cost basis of your "new" rental property would be:
What you originally paid for the property, plus your cost of improvements to get it back into service, minus the value of your loss, minus that percentage of your depreciation that was not a part of your loss.
Then you will start depreciation all over from year one, based on the new cost basis for the structure.
The new cost basis would include whatever insurance paid out, as well as any out-of-pocket you incurred. Typically, your out-of-pocket would include your deductible, and maybe a bit more.

[fgrentalproperty]

Thanks! I also received rental loss paycheck from insurance company. If I convert the property to personal at the date of fire, where should I put those money? And also insurance company paid me 200k for restoration in 2023, but I haven't started yet. In my 2023 tax return, should I not mention about these 200k, and report it in 2024 tax return when I paid the contractor?

[Carl]

The payout for lost rents is rental income. It flat out does not matter when or if you converted it to personal use. It still gets included in the rental income.
If you "bank" the payout and do not use it for restoration/rebuilding in the same tax year as the payout, then that payout is also rental income. That's because there's nothing that says you "have" to rebuild. You can very well pocket the money and never rebuild if you want. Typically, the taxability of that will be offset a little (not totally) by the loss you claim in the Casualty and Thefts section under the Deductions and Credits tab.
There are others that will disagree with this, and it doesn't matter to me.

[fgrentalproperty]

Hi @Carl , thanks very much for your explanation.