Rental Property

[sodacity14]

The pipes inside my rental property burst in Jan 2020 and it took a full 12 months to make repairs due to the size of the damage and the amount of time it took for my insurance company to respond to my claim. How would I classify this on my taxes? Due to the damage to my property, the rental wasn't available for rent. Am I able to write off the loss of rent?

[DoninGA]

Loss of rent is not an expense that you can deduct.  You can enter on Schedule E any expenses you paid for and were not reimbursed by insurance even though the property was not rented

[sodacity14]

I assume that means mortgage payments and interest? 

[DoninGA · Accepted solution]

---

@sodacity14 wrote:

I assume that means mortgage payments and interest? 

---

Mortgage payments are not an expense you can report on a Schedule E.  Only the mortgage interest paid would be an eligible expense.

[Carl]

You will report it exactly as you would if it were rented the entire year. The only difference is, you will have zero rental income, and the expenses you paid for the repairs.

Also note that any monies received for any reason from any source for rental property is rental income. So that will include the insurance payout.

You should also check your policy, as most rental dwelling policies I deal with include a provision for loss of rent, where in addition to paying for the damage and repairs, the policy also pays out a maximum of 85% of the lost rent for a period of time. Generally 6 months. But I've seen policies that will pay up to a full year of lost rent.

So once you include the insurance payout in the rental income, it's taxability will be offset by the repairs you used that money to pay for.

The insurance payout is reported in the tax year it is paid to/received by you. The repairs are reported in the tax year you pay that expense.

So why is your insurance payout taxable? Because, those premiums you paid for the coverage were a tax deductible rental expense. Therefore the payout is reported as rental income on the tax return, and it's taxability will be offset by the deductible repairs and other expenses that payout was used to pay for.

[M-MTax]

If the insurance payout was less than...or equal to....the cost of repairs it's not necessary to report the payout as income at all. Most insurance companies won't even issue any kind of tax reporting statement for that. Also MOST insurance policies that cover casualty and liability for rental properties do NOT include lost rental income.

[Carl]

If the insurance payout was less than...or equal to....the cost of repairs it's not necessary to report the payout as income at all

That's another route to go, meaning that you would not claim the cost of repairs either - except for cost in excess of the insurance payout.

do NOT include lost rental income.

Fairly standard in FL where I"m at. I know all my policies cover up to 85% of lost rental income for a maximum period of 6 months. Now I've only talked to other rental owners in my area, and they all acknowledge there's a "loss of rental income" clause in their policies. Keep in mind that the "loss of rent" payout is not applicable in all situations either. I don't know if it would apply to a situation of broken water pipes. It might not for all I know. But I do know it does apply in case of major fire damage making the property uninhabitable.

[M-MTax]

But I do know it does apply in case of major fire damage making the property uninhabitable.

Makes sense. I've only seen policies that cover loss of rental income with riders. Anyway I'd bet you'd have to have a renter that was displaced by the casualty and had to vacate while a lease was in force.

[Carl]

I'd bet you'd have to have a renter that was displaced by the casualty and had to vacate while a lease was in force.

I don't know for a fact, but I think that's fairly standard in my area. At least, that's what's in my policies. I can't compare providers at this time because at present all 3 of my rentals are with the same insurer.