Rental property fire damage, insurance payout handling

[fgrentalproperty]

I have a rental property that had fire damage in March 2023. Insurance paid for lost rent until now, and paid 200k for restoration in September 2023. I talked to several contractors and their estimation are all more than 500K for the restoration. So I have to hire a public adjuster to negotiate with the insurance company. We haven’t started the restoration until now because the negotiation is not fully settled down yet. Our plan is to start restoration in this year (2024) and rent it out again when restoration is done.

My question: how should I handle insurance payout that was given to me in 2023 (200K). Do I need to put it somewhere in TT in my 2023 tax return? If I include insurance payments as income, it will cause large tax liability for me in 2023. Can I calculate everything after the restoration is done and include this in my 2024 tax return?

Thank you in advance for all your help.

[PatriciaV]

Yes. The taxable part of the insurance payment will be reported as income for the year you regain the use of the property. Note that any loss would be deductible only if the fire was due to a federally declared disaster.

Also be aware that the reimbursement for lost rent is taxable as rental income, which may be offset by ordinary rental expenses (unrelated to the fire).

[fgrentalproperty]

Hi @PatriciaV , thanks very much for your comments. I have a follow-up question. 

For tax year 2023, should I claim the loss, or wait until tax year 2024 to claim the loss when I regain the use of the property? On one hand, I "think" I may need to report this loss since it happened in year 2023 ( but I may be wrong). On the other hand, since I don't have the total restoration cost and insurance payout numbers yet, I cannot give an accurate deductible numbers because not all of the loss can be deductible (not due to federal declared disaster).

[PatriciaV · Accepted solution]

Your best option is to wait and report the entire casualty loss when you have regained the use of the property and know how much of the cost was covered by the insurance payments.

Here is the reference for this treatment: IRS Pub 547 Insurance and Other Reimbursements.

[fgrentalproperty]

Great! Thanks very much!