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[Opus 17]

[Edited]

I'm going to remove this answer and re-write it.

[Opus 17]

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@Anonymous_ wrote:

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@Opus 17 wrote:

And also (4), if you received an insurance payment, that reduces your cost basis.  (The other expert says it increases the selling price, that will technically have the same effect on the gains calculation.)

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How is the calculation going to be handled and reported in the following scenario?:

The land was sold for $150,000 (which @Caroleg22 mentioned in another thread) with a basis of $150,000 and the insurance payout on the destroyed house itself was, for example, $350,000? In other words, this was a limits claim and payout.

Report a basis of -$200,000?

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Now that I think of your specific example, if the cost basis was $150,000 and the insurance payment was $350,000, the taxpayer would be required to report and pay tax on a $200,000 capital gain in the year of the insurance payment. (See publication 547, Gain from Reimbursement).  Then, when selling the property in 2024, their basis is zero and they have a $150,000 capital gain.  (Although they can increase their basis in the land by the cost of demolition and remediation.)

And I don't know how the exclusion would apply.  It may be that the exclusion can be used for both transactions, as long as the land is sold within 2 years of the destruction of the house.  But I would want an expert to review that.  

So we really need to know what @Caroleg22 did in 2022. 

[Opus 17]

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@Anonymous_ wrote:

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@Opus 17 wrote:
Now that I think of your specific example, if the cost basis was $150,000 and the insurance payment was $350,000, the taxpayer would be required to report and pay tax on a $200,000 capital gain in the year of the insurance payment.

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The total purchase of the property (the cost of the land plus the cost of the house), I have to presume, was more than the $150,000 @Caroleg22 received for just the land. 

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In her other post she said she bought the whole thing for $150K, then sold the land for $150K after the fire. 

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/re-then-you-have-nothing-to-repo...

[Opus 17]

@Caroleg22 

After further thought,

Yes, in principle you can claim the exclusion.  However, the calculation is complicated by any insurance payment you received in 2022, because that reduces your basis and might have been taxable in 2022.

You say you bought the property 15 years ago for $150,000.  There was a fire in 2022.  You did not rebuild the house.  You sold the land in 2024 for $150,000.

Can you answer these questions to start:

1. Did you get an insurance payout in 2022? How much?

2. Did you declare a casualty loss on your tax return?  If so, how much?

3. If you received an insurance payout in 2022, did you declare it (or part of it) as taxable income on your 2022 tax return?

4. Did you pay for demolition or remediation of the land after the fire, and was that covered by insurance or did you pay out of pocket?

[Edited to add]

5. Did you pay for any permanent improvements between the purchase and the fire (like a new roof, solar panels, new furnace or air conditioning, and so on)?

[Opus 17]

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@Anonymous_ wrote:

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@Caroleg22 wrote:

We recieves a payout in 2023 for 370,000.

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You received $370,000 from the insurance company for the house and then another $150,000 when you sold the land to a third party?

If so, that would be a total "selling price" for your property of $520,000. Subtract your basis and that would be your gain. 

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I respectfully disagree.  The $370,000 is a taxable capital gain transaction in 2022, when you received the payment (per IRS publication 547, starting on page 18).

https://www.irs.gov/pub/irs-pdf/p547.pdf

You start with your adjusted cost basis, that is the original purchase price, plus the cost of improvements.  Let's say you can establish $50,000 of improvements, so your cost basis is $200,000.  You have a capital gain in 2022 of $170,000.  You can use the personal exclusion, and not pay tax on the gain. You don't have to report it on your tax return (unless you get a 1099-S form), but keep records of what you did for at least 6 years in case of audit.  

If you bought a replacement property with the insurance money (we didn't ask about this), you can choose to postpone this gain and transfer the basis to the new replacement property, and not use the exclusion at all.  See publication 547 on page 18.  You also don't need to report the loss/gain on your 2022 tax return, unless you got a 1099-S form.  Just stay silent to the IRS, but keep records for as long as you own the replacement property.  And you might want professional assistance to help you determine your basis in the new property. 

Now, your adjusted basis in the land alone is zero, so the payment in 2024 of $150,000 is all taxable capital gains.  The question is whether you can extend the exclusion to cover the land (in my example, you have $80,000 of the exclusion left if you file single or married filing separately and $330,000 of the exclusion left if married filing jointly.)  If you bought a replacement property and postponed the gain, then you did not use your exclusion at all, and you can use it now.   If you did not buy replacement property, and you used your exclusion in 2022, then I have two thoughts, and I don't know which is correct.

a. If you sell the land within 2 years of the fire, you can include the land in your exclusion, meaning it is partly taxable if you are single, and excludable if you are married filing jointly.

b. If you sell in less than 2 years it is not excludable because you used your exclusion and you can only use it once every 2 years, but if you sell after 2 years (and before 3 years) you can use your exclusion because you meet the 2 year/5 year rule and you have not used your exclusion in the prior 2 years.  (And in this case you would get a full exclusion and not a partial one, because it was more than 2 years so the exclusion resets.)

I think the correct result for 2024 is to report a selling price of $150,000 and a cost basis of zero, and I think you can claim the exclusion of $80,000 if you are single and sold in less than 2 years, or an exclusion of $250,000 or more if you are married or you waited more than 2 years.  I also think that postponing the gain into a replacement property is not financially sound in your situation unless you plan to sell the replacement property in less than 2 years. However, you might want to review these scenarios with a professional.

@rjs   @DoninGA  do you have thoughts?

[Opus 17]

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@Anonymous_ wrote:

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@Opus 17 wrote:
You start with your adjusted cost basis, that is the original purchase price, plus the cost of improvements...

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Just to be succinct, I do not disagree that reporting could be appropriate for the receipt of the insurance proceeds in 2022 but your assessment of the figures is off.

The $370,000 received was received as an insurance limits claim for a house that was completely destroyed; the land was not involved in this transaction whatsoever and needs to be accounted for separately. 

Basis and value are not the same thing.  The taxpayer bought real property (land plus a house) for $150,000.  They received $370,000.  Therefore, their basis is reduced to zero, and there is a $220,000 gain (ignoring the effect of improvements and the exclusion).  The land has value, certainly, but the basis (the amount the taxpayer has invested in the land) is zero because of the reimbursement.  

There is nothing in publication 547 that says the basis of the land must be accounted for separately. Publication 551 does indicate basis must be allocated, but that is for depreciation purposes, which is not involved here.  If the basis must be allocated for non-business real property as well, then the taxpayer has a larger gain in 2022, which might exceed their exclusion if they are single or MFS.