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Rental Property Total Fire Loss

My inherited rental income house burnt down in 2020.   I had insurance on it and they paid me out for total loss minus 1K deductible.  The house was signed over to me in 2012 by my father but he did not pass away until 2016.   I received structural payouts for the house and the garage.  I received landscape payouts, clean up payout and loss of rents.    I know I need to declare loss of rents payout as rental income.  My question is:  Do I have to pay taxes on the structural payouts?  I believe the answer to this is yes.   If so, then what is my cost basis, value when signed over to me in 2012 or when Dad dies in 2016?  If my capital gains, payout minus cost basis (?) are invested in to a rental property (1031 exchange?) within 2 years do I have to pay taxes on them?  If not invested, do I?    

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Level 10

Rental Property Total Fire Loss


@pashton wrote:

My inherited rental income house burnt down in 2020.   I had insurance on it and they paid me out for total loss minus 1K deductible.  The house was signed over to me in 2012 by my father but he did not pass away until 2016.   I received structural payouts for the house and the garage.  I received landscape payouts, clean up payout and loss of rents.    I know I need to declare loss of rents payout as rental income.  My question is:  Do I have to pay taxes on the structural payouts?  I believe the answer to this is yes.   If so, then what is my cost basis, value when signed over to me in 2012 or when Dad dies in 2016?  If my capital gains, payout minus cost basis (?) are invested in to a rental property (1031 exchange?) within 2 years do I have to pay taxes on them?  If not invested, do I?    


Yes, if the Insurance proceeds are more than your Basis, the amount over your Basis is taxable.

 

If you replace that property as an Involuntary Conversion (see 1033 Exchange, page 7 of Publication 544), yes, that gain can be transferred into the new property.

https://www.irs.gov/pub/irs-pdf/p544.pdf#page=7

 

As for your Basis, I'm a bit puzzled at why you are asking that NOW.  What you have you been using for depreciation?  You needed to have figured out your Basis years ago for the depreciation.  If you have not been claiming depreciation, you need to go to a tax professional to fix things.  

 

As for your Basis, you said your dad "signed over" the house in 2012.  Did he merely put you on the title but HE still maintained control over the home, pay for expenses, and if it was rented the collected the rents on the home?  Or was it actually 'yours' in 2012 and under YOUR control, you paid for expenses, and you collected any rents if it was rented then?

 

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Level 10

Rental Property Total Fire Loss


@pashton wrote:

Thought if I did not depreciate it them I would not have to pay taxes on that depreciation once I did sell it, so my depreciation is simple zero.   


Nope.  The depreciation that you COULD have take lowers your Basis regardless if you take it or not.  You will be taxed on the gain due to the depreciation that lowers that Basis.  Again, that is even if you did not actually take it.  So depreciation is required.  

 

If you filed zero depreciation for 2 or more years, you need a special form to 'catch up' on the depreciation, and you should go to a tax professional for that.

 

 

It sounds like the house probably qualifies under an Implied Life Estate.  If that is the case, the starting Basis is the Fair Market Value on the date of your dad's death.

 

Between (1) missed depreciation, (2) a Involuntary Conversion (§1033 Exchange) and (3) a potential Implied Life Estate, you really need to go to a tax professional for this.

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5 Replies
Highlighted
Level 10

Rental Property Total Fire Loss


@pashton wrote:

My inherited rental income house burnt down in 2020.   I had insurance on it and they paid me out for total loss minus 1K deductible.  The house was signed over to me in 2012 by my father but he did not pass away until 2016.   I received structural payouts for the house and the garage.  I received landscape payouts, clean up payout and loss of rents.    I know I need to declare loss of rents payout as rental income.  My question is:  Do I have to pay taxes on the structural payouts?  I believe the answer to this is yes.   If so, then what is my cost basis, value when signed over to me in 2012 or when Dad dies in 2016?  If my capital gains, payout minus cost basis (?) are invested in to a rental property (1031 exchange?) within 2 years do I have to pay taxes on them?  If not invested, do I?    


Yes, if the Insurance proceeds are more than your Basis, the amount over your Basis is taxable.

 

If you replace that property as an Involuntary Conversion (see 1033 Exchange, page 7 of Publication 544), yes, that gain can be transferred into the new property.

https://www.irs.gov/pub/irs-pdf/p544.pdf#page=7

 

As for your Basis, I'm a bit puzzled at why you are asking that NOW.  What you have you been using for depreciation?  You needed to have figured out your Basis years ago for the depreciation.  If you have not been claiming depreciation, you need to go to a tax professional to fix things.  

 

As for your Basis, you said your dad "signed over" the house in 2012.  Did he merely put you on the title but HE still maintained control over the home, pay for expenses, and if it was rented the collected the rents on the home?  Or was it actually 'yours' in 2012 and under YOUR control, you paid for expenses, and you collected any rents if it was rented then?

 

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New Member

Rental Property Total Fire Loss

Thank you so much, very appreciated.

 

He maintained all expenses and lived in it until he passed away in 2016.   I have to check my returns, but I do not believe I have been taking any depreciation, as I have not needed it due to the lack of it being able to be rented.  I had a lot of work to do to it as my Dad was in it for 50 years.  So, it did not get rented out until 2018, but I still did not need the depreciation as the rents were low and I netted far less than minimal gross tax amount.   Thought if I did not depreciate it them I would not have to pay taxes on that depreciation once I did sell it, so my depreciation is simple zero.   I know the value of the property when he passed away and can use that minus the land value to calculate a basis for the house.  But then, anything over that basis, would be taxed unless I put it back into a 'like' property or the 'same' property?   I will read your suggested reading in your first reply.   Again, thank you for answering.

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New Member

Rental Property Total Fire Loss

and from what I can tell, i have two years after the close of the tax year of the loss, to find that like property.   But, have to figure out how to file a 1031? so I don't get taxed in 2020, but have until end of 2022 to find the like property or rebuild the current one, I believe?

Highlighted
Level 10

Rental Property Total Fire Loss


@pashton wrote:

Thought if I did not depreciate it them I would not have to pay taxes on that depreciation once I did sell it, so my depreciation is simple zero.   


Nope.  The depreciation that you COULD have take lowers your Basis regardless if you take it or not.  You will be taxed on the gain due to the depreciation that lowers that Basis.  Again, that is even if you did not actually take it.  So depreciation is required.  

 

If you filed zero depreciation for 2 or more years, you need a special form to 'catch up' on the depreciation, and you should go to a tax professional for that.

 

 

It sounds like the house probably qualifies under an Implied Life Estate.  If that is the case, the starting Basis is the Fair Market Value on the date of your dad's death.

 

Between (1) missed depreciation, (2) a Involuntary Conversion (§1033 Exchange) and (3) a potential Implied Life Estate, you really need to go to a tax professional for this.

View solution in original post

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Level 15

Rental Property Total Fire Loss

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.