Rental Property Partial Fire, how to report insurance reimbursement

[Victoria888]

My rental property was partial destroyed in a fire.  The house is under construction to restore the property back to its original condition.  To be clear, I am fixing the house to be back to its original condition (nothing luxury or fancy or add ons).  I am receiving insurance reimbursement for the construction of the property (ie. to restore the house to original condition).  How is this treated for taxes? What forms do I need to complete?  Is the insurance reimbursement taxable even though I am spending it on restoring the house?  I am not going to claim a casualty loss on the return.  The house is also not going to be sold and continue to be rented once construction finishes in a few months.  It's about a 3 month long construction process.  Thank you!

[KrisD15]

If the insurance covers the damage, and the repairs are made, there will be no taxable event. No loss and no gain. 

You are not allowed to deduct "Lost Rent" while it s under construction. (There is no such thing as a deduction for lost rent)

If you have insurance funds left over, that amount will need to be reported as a gain. 

Here is more information. 

[Victoria888]

Thanks for this.  I am wondering though since I will receive a 1099 from insurance, I need to report this as income so there probably is a form that would need to report the income and show less repair costs.

[SharonD007]

As @KrisD15 mentioned in the post above, the insurance proceeds that cover your fire damage are not taxable. The insurance company will not issue you a Form 1099 for your loss. It is not considered income.

[Victoria888]

I read that if the insurance reimbursement is greater than the adjusted basis of the property, then the excess could be taxable even if you use the entire amount of the reimbursement for repairs.  For example, I bought the house for $150,000 30 years ago.  The damage to repair is $250,000.  The insurance reimburses me for $300,000 and I put the entire amount into the restoration of the house.

For simple math, does the IRS consider my adjusted basis to be $150K so the excess of $100,000 is taxable gain?  

This is the part I'm stuck on.

[AmyC]

No. I am assuming you are filing form 4684. The amount of your casualty loss is the lower of $150k paid or $250k value. You are correct the basis is $150k - unless you had improvements to the property. Any improvements over 30 years of ownership need to be accounted for. A fence, some trees, a new porch, etc.

Insurance paid you $300k. The difference is $150k. However, you made a comment that your damage was $250,000. Therefore, you actually only received $50,000 as gain. Unless, you used all of it for actual repairs to return the home to what you had before the damage. In the beginning, you said all of it is going to repairs, this would mean nothing taxable.

The IRS is looking to tax the increase in your wealth, not maintaining what you had prior to the fire. Instead of you having a $400k basis with the improvements, it maintains the basis prior to the fire, $150k. 

Form 4684 instructions state:

Don't report the gain on damaged, destroyed, or stolen property if you receive property that is similar or related to it in service or use. Your basis in the new property is the same as your basis in the old property.

This means, your depreciation of the rental will remain as it has been. Nothing changed on your rental house sch E. You won't deduct the improvement or change the basis.

IRS pub 525 states:

Casualty insurance and other reimbursements.

You generally shouldn't report these reimbursements on your return unless you're figuring gain or loss from the casualty or theft. See Pub. 547.

[Don11]

I received replacement value for fire loss on mobile home.  Cost to repair is more than what I received.  Planning on just giving it to someone.  Do I have to report replacement money as income?

[PatriciaV]

No, you are not required to report a casualty loss (reimbursement less than replacement cost).  Per IRS Tax Topic 515, the only deductible casualty losses must be from a federally declared disaster. Otherwise, you have nothing to report.

@Don11