In 1999, my wife was gifted a piece of land for $1 from her grandparents. I built a single family home on that property where we have lived since then. In 2014, we lost the home in a wildfire and our insurance company paid us to rebuild and I personally rebuilt the house. How do I calculate cost basis on home? Is the cost basis the amount the insurance company paid me to rebuild my house?
basis comes from IRC code section 1033
(a)General rule
If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted—
(1)Conversion into similar property
Into property similar or related in service or use to the property so converted, no gain shall be recognized.
(b)Basis of property acquired through involuntary conversion
(1)Conversions described in subsection (a)(1)
If the property was acquired as the result of a compulsory or involuntary conversion described in subsection (a)(1), the basis shall be the same as in the case of the property so converted—
(A)decreased in the amount of any money received by the taxpayer which was not expended in accordance with the provisions of law (applicable to the year in which such conversion was made) determining the taxable status of the gain or loss upon such conversion, and
(B)increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which such conversion was made.
the basis for the land is the basis the grandparents had - a donee takes on the tax basis of the donor
since you rebuilt the house the rules above apply.
Your basis is what you paid to build the house plus your basis in the land. Because the land was a gift, your basis in the land is whatever the grandparents paid for it originally. This might be found in county records. If you don’t know what you paid to build the house, you can reconstruct or estimate as best you can. However, in case you are audited, the IRS is not required to award any basis that you can’t prove. (You can include the cost of materials and labor that you paid for, the cost of architect plans, building permits, inspections, utility hook ups, and other expenses associated with building the house, but you cannot claim anything for the value of your own labor, if you provided free labor to the project.) The fire and the insurance payout are ignored because they cancel each other out.
ok, the property that was gifted to us is a piece of tribal trust property that dates back before the state was a state and is not governed by the state or the tribe and is not taxable land. My wife paid $1 love and? For the property to record it in our name with the tribe.
In turbo tax, I am not sure which boxes to click on as I didn’t buy my home, I built my home myself. I was paid $560,000 by the insurance company to rebuild my home and I spent about $450,000 to build it myself. If I click the boxes that lead me to calculate cost basis, and I click acquired property in a different way than purchasing it, it doesn’t allow me or it doesn’t calculate depreciation? I have thus far clicked purchased home for $450,000 and I have left all boxes blank for title fees, filing fees etc. I have listed cost basis of land at $1 as that is what my wife paid? Should I approach this differently?
Also, it asks me about if the property has had a major loss such as hurricanes or tornadoes or earthquakes and I put no, because my previous home that was destroyed in a fire did, but my current home that I rebuilt after the fire hasn’t had any claims from insurance. Is that how I should be treating this or am I thinking about that wrong?
You don't need to use the calculator if you know the basis. If the grandparents didn't pay for the land, then you have no basis in the land, and your only basis is what you paid to build the house. "Bought" for the cost of building is adequate for tax purposes. You can't take depreciation unless the house was used for business or as a rental, if it was, you must follow through with that because you have pay tax on (recapture) the previous depreciation.
The questions about a loss relate to possible deduction of a casualty loss, or receipt of an insurance payment without rebuilding, since those things adjust your basis. As long as you used the insurance to rebuild, then the gain from the rebuilding cancels out the loss from the fire and you can go ahead and say you don't have a loss.
Thank you. We rented our home in question for short term rentals last year so we need to establish a basis for depreciation.
@chuckjim wrote:
Thank you. We rented our home in question for short term rentals last year so we need to establish a basis for depreciation.
You rented it only in 2024, before selling in 2024? I think you can ignore depreciation, don't claim it on your rental income and don't report it as recapture on the sale. If the only depreciation is in the year of the sale, I think it cancels itself out, although I could be wrong.
We lost our home in 2014 due to a fire. We had insurance and rebuilt the home in 2015. This year(2024) we rented it on Airbnb and that is why we need to establish the cost basis of our home for depreciation to offset gains from rental.
@chuckjim wrote:
We lost our home in 2014 due to a fire. We had insurance and rebuilt the home in 2015. This year(2024) we rented it on Airbnb and that is why we need to establish the cost basis of our home for depreciation to offset gains from rental.
But I think that is irrelevant if both the rental and the sale happened in 2024. I don't even think you can legally claim depreciation in this situation, but I could be wrong.
Even if you could, this is what would happen:
You place the property in service as an AirBnB. Your basis for depreciation is the cost basis of the property, minus the value of the land (even though the land does not have a basis in your situation, it has a value). Since the basis is $450,000, let's say the land is $50,000. So the basis of deprecation is $400,000. Your depreciation is $1212 per month for each month the property is available for rental. That is an expense that decreases your taxable rental income on schedule E without decreasing your cash flow. You pay less tax on the rental income.
Then, on the capital gains calculation, even if you are covered by the $500,000 exclusion for married filing jointly, you must still pay depreciation recapture at your regular income tax rate. That causes you to pay more income tax on the sale of the property, that exactly balances and cancels out the tax you saved on the rental income.
However, if your net rental income is zero or negative, you generally can't take the loss against your other income. That means you might get no tax savings from depreciation AND have to pay income tax on the recapture. A net increase in your tax bill for no benefit.
In any case, you may want to consult a professional.
We still own our home. We didn’t sell it. We just started to rent it this year. We live in the house 4 months and rent it the other 8 months
I don't even think you can legally claim depreciation in this situation, but I could be wrong.
This being Section 1250 property, depreciation can be deducted in the year of the sale. Of course this is a wash since there would be recapture in the year of the sale.
I was paid $560,000 by the insurance company
If you then spent $450,000 to rebuild as your total replacement costs, you have a $110,000 capital gain.
My mistake, I thought you were trying to calculate the cost basis so you could sell and determine your capital gains.
I think we have a different understanding of what the $450,000 was. But we need to clarify.
How much did you pay to originally build the house? That is your cost basis. If you paid $450,000 originally, and then there was a fire, you received $560,000, and you rebuilt the house, then the fire and the insurance payout are ignored and your cost basis is still $450,000. However, if you paid something different to originally build the house, then you received a $560,000 insurance settlement but only paid $450,000 to rebuild the house, then the calculation becomes much more complicated, and we need to be completely clear on the details.
And finally, whatever your cost basis is, you must subtract something for the value of the land, because land doesn’t depreciate. Even though you have no cost basis in the land because of how it was acquired, you must subtract the value of the land from your depreciation basis when you list the property as a rental.
How much did you pay to originally build the house?
You mean how much did @chuckjim pay to build the original house, right? The house that was destroyed by the fire? That would be the cost basis and the basis for depreciation. The $450,000 received from the insurance company is a nonrecognition event so no tax would be due on the difference between the $450,000 payout and the basis of the house that was destroyed by fire.
Ok, let’s make sure I understand this correctly
first, the original home that I built in 1999, but lost in a fire in 2014 is what I base the current cost basis or value of the home for depreciation? If my original cost was $450,000 for me to build my original home, and I was paid $560,000 by my insurance company, I completely ignore the $560,000 number and go off of the $450,000 it cost me to rebuild my home?
second, for the cost basis of the land that was given to my wife by her grandparents, that was purchased for $1 love and interest, and was most likely obtained from the federal government over 150 years ago as some form of treaty settlement is yo be given some form of meaningful value? Should I put down $10,000 instead of $0 for the cost basis of the land?
if my original home that I lost in a fire was built in 1999, and would have been 25 years old today, would the depreciation of 27.5 years leave only 2.5 years remaining to depreciate the value of the original home?
not sure if this all makes sense?
Depreciation starts when you place the asset in service, not when you originally bought the asset or built it.
You're going to base depreciation - over 27.5 years - on your cost to build the house not the insurance payout, and of course land is not depreciable so you can ignore that as part of the depreciation calculation. That will only come into play when and if you ever sell.
1. The cost basis is whatever you paid out of pocket to build the house. You can include materials, labor, permits, inspections, and other out of pocket costs, but not the value of your own labor.
Because you rebuilt the house after the fire using the insurance settlement, you ignore both the fire damage and the settlement, and the basis remains whatever you paid in 1999.
2. You need to determine a fair market value for the land, based on local market conditions. We can't tell you if any arbitrary amount is correct or not. If you don't know, you might consult a real estate professional or the local tax assessors office.
3. Depreciation starts whenever you place the property in service as a rental (for business). The age of the property or how long it was used for personal purposes is ignored.
Very clear now. Thank you! If audited, how would I defend the cost basis on a home I built 25 years ago that was lost in a fire that contained all my supporting documents or receipts for materials and contracted out labor?
Because you rebuilt the house after the fire using the insurance settlement, you ignore both the fire damage and the settlement, and the basis remains whatever you paid in 1999.
That is true except @chuckjim can't ignore the fact that the insurance settlement was $560,000 and $450,000 of that was spent on building the new house. That leaves a gain of $110,000.
If the records were destroyed in the fire, an estimate of the cost of materials could be used as an approximation for the basis in 1999. The IRS does understand that docs get destroyed in fires and other casualties.
Our home was destroyed by a federally recognized disaster area and I believe in 2014, when our taxes were filed, the gain was deferred but I don’t see where we ever paid the tax on the gains? That was 10 years ago. I’m wondering if we could have been exempt from capital gains as we lived in the home that was destroyed for the prior 15 years? Not sure how or if those returns can be amended?
You wouldn't if you qualified for the home sale exclusion - $250,000/$500,000 - and Section 1033 also comes into play.
I think you misunderstand the numbers. The original construction cost in 1999 was $450,000. The insurance settlement to rebuild in 2014 was $560,000.
I think you are getting confused and overthinking.
What do you mean “the gain was deferred”? You could have taken a casualty loss deduction in 2014, if you didn’t plan to rebuild. You would possibly have had a gain if the insurance payout was more than the rebuilding cost, but that gain could not have been postponed. If you took a casualty loss in 2014 and then got a payment in 2015, that would have been taxable in 2015 or the 2014 return would have to be amended.
Let’s get clear once and for all.
1. How much did you pay to build the house in 1999?
2. How much was the insurance settlement after the fire in 2014?
3. How much did it cost to actually rebuild the house after the fire?
4. Did you claim a casualty loss on your 2014 tax return or do anything else on your 2014 return in relation to the fire?