Calculate cost basis?

[chuckjim]

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?

[Mike9241]

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. 

[Opus 17]

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.

[chuckjim]

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?

[chuckjim]

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?

[Opus 17]

@chuckjim 

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. 

[chuckjim]

Thank you. We rented our home in question for short term rentals last year so we need to establish a basis for depreciation. 

[Opus 17]

---

@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.

@rjs 

@AmeliesUncle 

[chuckjim]

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. 

[Opus 17]

---

@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.

@Critter-3 

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.

[chuckjim]

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 

[chuckjim]

We will never sell this property. 

[M-MTax]

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.

[M-MTax]

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.

[Opus 17]

@chuckjim 

My mistake, I thought you were trying to calculate the cost basis so you could sell and determine your capital gains.

@M-MTax 

I think we have a different understanding of what the $450,000 was. But we need to clarify.

@chuckjim 

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.