Calculate cost basis?

[M-MTax]

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. 

[chuckjim]

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?

[M-MTax]

@chuckjim

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. 

[Opus 17]

@chuckjim 

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.  

[chuckjim]

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?

[M-MTax]

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.

[chuckjim]

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?

[M-MTax]

You wouldn't if you qualified for the home sale exclusion - $250,000/$500,000 - and Section 1033 also comes into play.

[Opus 17]

@M-MTax 

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.  

[Opus 17]

@chuckjim 

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?

[M-MTax]

@Opus 17 

OK, I got that but did @chuckjim spend all of the settlement proceeds to rebuild? The settlement was $560,000 but how much of that did @chuckjim spend on rebuilding? 

[M-MTax]

Let’s get clear once and for all. 

Boy, that's a great idea. 🙂

[chuckjim]

We spent 450,000 of the $560,000 we received and built a smaller home 

[chuckjim]

We spent approximately $450000 to build our 5000 sq Ft home in 1999

we received $560,000 as a payout from our insurance company 

we spent $450,000 to rebuild a 3200 sq Ft home in 2015, but the payout was made in 2014 the same year as the fire

i beleive there was a casualty gain that was listed on taxes in 2014, but I recall that the gain was deferred and not paid in 2014 as it was part of a federally recognized natural disaster area?  
im not sure why our accountant didn’t file for a capital gains exclusion and instead opted to list our gain?

[chuckjim]

Ok, so looking at our 2014 taxes, it looks like our accountant filed form 1033, an election to defer gain or involuntary conversion with property located within a presidentially declared disaster area

it was listed as our primary residence 

The type of conversion was listed as “destruction”

the replacement property was listed as “rebuilt same”

computation of realized gain was

$538,121

aquisition cost of replaced property was listed as $475,000

realized gain was $63,121

also, a 4684 form was filed or casualty and thefts

this listed both the primary residence loss as well as personal property losses

the primary residence loss resulted in a $63,121 gain

the personal belongings created a loss of $14,216

that left a difference of $49,005 as a capital gain on 1040 line 13 and also listed as a $49,005 net long term capital gain on schedule D

On form 1040 qualified dividend and capital gains tax worksheet line 21 is also $49,005

line 24 on that form was calculated to be $9221

So, it appears that we did pay the tax on the capital gains in 2014

I think what made me think it was deferred is on form 1033, it says “election to defer gain or involuntary conversion