Rental property lost to fire. I took insurance payout and razed the building. I still own the land. How do I report and reclaim depreciation? I do not plan to rebuild..

[slsargent]

I lost at rental property due to a fire. I took the insurance payout and razed the building. I still own the land and I do not plan to rebuild. Turbo Tax refers me to form 4684, but this in not in a federal disaster area. If I use to asset depreciation section instead, it wants to include the land, which I still own. How do I report this and reclaim the depreciation on just the building and the other items depreciated over the years?

[JulieR · Accepted solution]

First, land is never depreciated so there will be no depreciation recapture on the land.  Your basis for depreciation in the home should not have included the cost allocated to the land.  

Second, you will treat this loss as a "sale", instead of a casualty loss. The insurance essentially  "paid" you for the house so it will be completely "disposed".

To report this: 

1. With your return open in TurboTax, search for rentals and then select the Jump to link in the search result.
2. Answer Yes to the question Did you have any rental or royalty income and expenses?
3. When you get to Is this a rental property or royalty? select Rental property and fill out the description, address, and owner (if not already populated in the return).
4. When you hit Do any of these situations apply to this property? check the Sold box along with any other boxes that may apply.
5. Continue following the onscreen prompts to enter info about your rental property (you can answer "yes" to the questions about whether the house was rented all year). Eventually, you'll get to the Rental Summary screen (see screenshot below). You can report the sale in the Sale of Property/Depreciation section, along with any other pertinent info (like income and expenses)

Please comment if you need additional help with this.

[slsargent]

Thank you so much for this. This is the method I originally used, but since this is real estate property the depreciation was originally set up with a land value.  When I indicate I sold the property (to insurance) it wants to know how much I sold the land for.  If I put zero, it will give me a loss (as if I gave the land away). If I give it a value, the land is included with the sale, but I still own the land and still have expenses associated with it.  Thank you in advance for any help you can offer.

[inforules]

If this is done, what happens if you actually sell the land?  Can this action be postponed until a decision is made? If so, is there a time limit?

[slsargent]

First I am not a tax expert, but I have now done considerable research on this.  It looks like the proper way to report this is under Deductions, Casualties and Thefts, which ultimately fills out form 4684.  Going through the steps allows you to show the building and contents destroyed, reclaim you depreciation on building and contents using your adjusted basis, and then place a value on what is left (the land). Since my insurance payout was higher than the adjusted basis, it gave me a capital gain (like selling the building and contents, but not the land).  If I sell the land later, I will also have to report any gain on that using the land cost (since it was never depreciated) as the basis.  In addition, if you think you may replace the building at some point in the future, this gives you the option of deferring any capital gains for a period of time (Up to two years I believe).        

[demitchx]

Not sure if I should add complexity to this question here but we have the same situation except we received the initial insurance payout in the year of the fire (California 2017) and a second payment in 2019 when we purchased an existing replacement property. We sold the land in 2019 also. To further explain. In 2017 we postponed the gains by declaring a 1033 thinking to rebuild. In 2018 we reported loss of rent insurance and property taxes on land in Sch E. without taking depreciation. After several months of contractor delays we decided to exit the rental business and pay the gains. We were concerned about how the IRS would look at not following through on the 1033 and not paying the gain on the 2017 insurance payment so we amended the 2017 taxes using the 4684 form like mentioned above. We were uncertain how to handle the second (2019 payment) so we added it to 2017 for the full gain. We knew we would be in a similar tax bracket in 2019 so the tax hit would be the same. Maybe this is beyond the scope of this forum but if there is any CPA's that can guide us fire victims we would be grateful. Thanks.

[Carl]

The above responses are valid attempts, but not the right way since you have no intention of rebuilding, yet for 2019, you retained the land for the entire tax year.  As you may already know, your losses on rental property can not be "realized" until the tax year you sell the property. This still holds true in your case.

For starters, the insurance payout is 100% reportable as rental income. Period. Remember, you got to deduct the insurance premiums you paid for that policy from the rental income. Therefore, any payout on that policy is reportable rental income.

*ANY* income received for rental property from any source for any reason, *is* rental income. Period. Therefore you include the amount as such, in the rental income section. Get that done, then deal with the loss.

In the assets/depreciation section work through the asset and select the option, "I sold or otherwise disposed of this asset in 2019" and work it through. On the "Special Handling Required?" screen, you *must* select YES. (If you select NO you will be *forced* to enter sales information, and it's a fact that you sold nothing.) Here's the screen-by-screen on this.

While working this through you need to write down the following:

-Date (this will be the in-service date. The acquisition/purchase date doesn't matter)

-Cost

-Land

-Prior Deprec

I am assuming business use percentage is 100%.

Next, your date of disposition is the date of the fire. Leave the "date acquired" alone and continue.

Click YES for Special Handling Required?

Now click the Add An Asset button.

Select Rental Real Estate Property, then continue.

Select Land Improvements and continue.

I suggest you enter the description as something like "Rental Property - Fire Casualty"

For cost, we will have to figure the correct cost here. The cost basically is the value of the land with the depreciation remaining to be taken on the structure added to it. Thus, this increases your cost basis in the land. That means you won't pay taxes on the remaining depreciation when you sell the property, since it's added to the cost basis of the land. This is how you "deduct" the depreciation remaining to be taken on the structure.

First, you need the value of the structure that burned. To get that, subtract the LAND value from the COST (you wrote these down above) . Label this answer "cost of structure".

Now subtract "total Deprec" from "cost of structure". This is the depreciation you have remaining on the structure.

Now add that remaining depreciation to the LAND value.

On your new asset you're entering, enter that amount in the COST box. This effectively increases your cost basis in the land, reducing any taxable gain you may realize when you sell the land. (Or increasing your loss if you sell it for less than this new cost basis.)

The "date purchased or acquired" will be the date you wrote down earlier. Then continue.

Select "purchased new" and "used 100% for business". It's okay for the "started use in business date" to be the same as the previous. This really doesn't matter all that much anyway, since land is never depreciated.

Then continue.

For "special depreciation allowance" select NO and continue. (You don't depreciate the land at all here)

For convention, it doesn't matter which one you select, since we're not depreciating this anyway. Just pick one and continue.

Now on the "Confirm your prior depreciation" screen there will be an amount in there greater than zero (I have no clue why). You *MUST* change it to the digit ZERO. Then continue.

On the Asset Summary screen it shows your 2019 depreciation expense for this as ZERO, and that's exactly what it's suppose to show.

Click continue and you're returned to the asset summary screen.

Take note that both the "old" (burned down) asset and your "new" land asset are listed there. They "BOTH" need to remain on your 2019 tax return and get reported to the IRS.

Next year when you do your 2020 tax return, both assets will be imported. When that happens (and it will) you can just delete the old asset from your 2020 return. Then if you sold the land in 2020 you'll report that sale by working it through the "new" asset.

My method allows you to keep track of your carry over losses on the form 8582, as those will help offset at least "some" of the taxable gain you're going to see on the insurance payout.

Subtract "total deprec" (you figured this earlier) from

Write down the Depreciation deduction amount for 2019. Add this to the "Prior Deprec" amount you wrote down earlier and label the answer "total depreciation". You will need this amount later. Then "Continue" to be returned to the list of assets.

[DanG2020]

Regarding replacing  "the building at some point in the future, this gives you the option of deferring any capital gains for a period of time (Up to two years I believe)."    -   Is this covered under IRS Sec 1033?

[KrisD15]

Yes, 

“(B)Period within which property must be replaced

The period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending—

(i)2 years after the close of the first taxable year in which any part of the gain upon the conversion is realized, or

(ii)subject to such terms and conditions as may be specified by the Secretary, at the close of such later date as the Secretary may designate on application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe.”

Source

[DanG2020]

Thanks,

Dan