I see *A LOT* of problems and legal issues with this thread.
My inherited rental income house burnt down in 2020. The house was signed over to me in 2012 by my father but he did not pass away until 2016.
Unless there is some kind of living trust in place this house was not inherited by any stretch of the imagination. In order for it to be inherited you have have to of acquired ownership of the property "AFTER" your father passed away. So unless specifically addressed in some kind of living trust, the fact is the house was gifted to you by your father.
That being the case, your cost basis is the exact same as your father's cost basis. To determine this cost basis you need to know if you live in a community property state or not, as this "could" matter if the house was originally purchased by your father *and* mother together. Here's the possible scenarios for this.
IF IN A COMMUNITY PROPERTY STATE
If your parent's purchased it together, then the cost basis is what your parent's paid for it.
When your mother passed away, your father got a 100% "step-up" in basis to the FMV of the property on the date your mother passed. This step-up in basis would already include any property improvements done *before* your mother passed away.
Added to that cost basis would be the cost of any property improvements your father paid for "AFTER" your mother passed away.
Since your father gifted you the house, included in that gift is your father's cost basis as explained above.
IF NOT IN A COMMUNITY PROPERTY STATE
If your parent's purchased it together then your fother got a "step-up" in basis of half of the FMV of the property on the date your mother passed. For example, say your parents paid $50K for the house in 1990. Then your mother passed in 2000. In that year the FMV of the property was $100,000. Your father gets a "step-up" in basis of half of that FMV - which is $50K. So your father's half of the original cost basis which is $25K, is added to 50% of the step-up basis of $100K, making your father's cost basis $75K.
Since your father gifted y ou the house, included in that gift is your father's cost basis as explained here.
house burnt down in 2020
100% of the insurance payout is rental income. Period. But that's not the end of this story.
Understand that all income received from all sources for any reason, for rental property is rental income. Period. Every penny of that payout is reportable as rental income on your tax return. Understand that does NOT mean it's all taxable. WHile the income is reportable, that does not mean it's taxable. But rest assured that some of it will be taxable income to you - no matter what you do. Many people ask why it's taxable. Simple really.
Those insurance premiums you paid every year was a deductible rental expense on your SCH E for every year you claimed and reported rental income. Therefore, any and all insurance payouts are reportable as rental income on the SCH E. Initially, it's considered taxable income. But there are things that will offset the taxability of some (but not all) of that payout.
First, even though the insurance company may have declared the property a total loss due to the fire, it's a total loss for the insurance company. It is "not" a total loss for you. That's because the insurance company does not insure the land. They only insure the structure(s) on that land. Therefore, your cost basis in the land *DOES* *NOT* *CHANGE* at all.
If instead of restoring the property and renting it again, you sold it in 2019, then you sold the structure only for the amount of the insurance payout, and you sold the land to a third party buyer. You add the insurance payout to what the third party buyer paid you for the land, and that's your total sales price.
