Insurance Claim for tornado damage on rental property

[Dengland37]

I had a rental property that I've owned for 10 years get damaged by a tornado. Insurance paid out 143k for the repairs and I had the home repaired for 95k. How do I report the gains of this in my taxes? 

[ColeenD3]

Please see this answer from DawnC0.

You report the gain from the excess insurance proceeds on Form 4684 which shows up under 'Other Gains' on Schedule 1 of Form 1040.  In TurboTax, you can report it under Casualties and Thefts which can be found under 'Deductions & Credits'.  For more information on these gains and how to postpone them, see here:  Reporting a Gain on Reimbursement

[Dengland37]

Thank you for the quick response!

I've looked here but it's not clear how to report them. When I select the Causualties and Theft menu and go to key it in, it asks me for the "cost basis" what is the cost basis? Is the cost basis the total cost of repairs or is it the cost of the house? 

Then it asks for the amount if insurance reimbursement. Is the amount the total of 143k or just the variance between it and the 95k cost of repairs.

Also, do I need to key in the repairs anywhere? 

And last, I know the FMV before the tornado but not after. Is the FMV after what it was worth damaged or what it's worth now that's it's fully repaired with the insurance settlement (Which would be largely unchanged since it was repaired)

Thanks in advance! I appreciate the help, this one is driving me crazy. 

[AmyC]

The cost basis varies depending on the item. If it was your main home, it would be how much you paid plus improvements. Being a rental house, you have to subtract out the depreciation that you have taken over the years.

Total reimbursement of $143k goes on your return.

The FMV after the tornado is what will determine your taxes. You spent 95k on repairs, if that covered ALL of the damage, then you can put the FMV as 95k less than the cost basis. However, if your damage was actually $150k and you are not going to rebuild the fence and plant the trees, etc then that is value lost. The FMV the moment after the storm hit is the question, not the newly recovered value with changed basis.

Please see About Publication 547, Casualties, Disasters, and Thefts - IRS for examples and details.

[Dengland37]

This helps a ton. Thank you. 

So, my original cost basis was 114k. I've claimed 29,099 in depreciation over the past 10 years or so(according to turbotax, which I've used all this time) so my cost basis is $84,901 and my insurance reimbursement is 143k.

95k did essentially cover all the cost of repairs.(I was the GC so I was able to shave off costs)  

So on the next page with FMV, my FMV before the storm(home value) was 137k.

So my FMV after is my cost basis of $84,901 minus $95k for repairs?  Which for me would be negative 5k? Or 95k minus original cost basis of 114k which leaves 19k? Or... is it the FMV minus the 95k which leaves 42k? 

Sorry for so many questions, thank you for all the help!

[Dengland37]

I also just read in the IRS publication that you mentioned that the adjusted basis is decreased by insurance payments but increased by repairs done to the property. So.. since my adjusted basis is 89k which is original cost minus depreciation. Do I then add the 95k in repairs to this to make my cost basis 184k for this? 

[AmyC]

Yes, usually people have more expenses than insurance. There are several terms, let's go through each and explain what the program is doing in relation to what the IRS says.

1. Original cost - perfect, you want to enter the $84,901
2. The program asks about insurance and does the math for you, enter $143k
3. Next, the program asks for the FMV of the property, that would be the value of the house on the market right before the event.
4. Now, FMV after the event, would in your case be, the FMV from right before the event, minus $95k for damage done.- I know you say that covered it all. You may want to re-evaluate the property. It is easy to miss somethings. You may have some things that have not been fixed that are still a deficit. 
5. Now, the program, will take the lesser of cost or FMV, add in the insurance, subtract out the damage, and determine that you made money. You have more income than expenses. It will take the difference and add it to your income.

I hope this helps to clear the mud! The program is trying to make it easier for you!

[Dengland37]

Thanks Amy, last question. 

I found this in the IRS publication you sent.

Adjustments to Basis
If you have a casualty or theft loss, you must
decrease your basis in the property by any insurance or other reimbursement you receive
and by any deductible loss. The result is your
adjusted basis in the property.
If you make either of the basis adjustments
described above, amounts you spend on repairs that restore the property to its pre-casualty
condition increase your adjusted basis. Don’t
increase your basis in the property by any qualified disaster mitigation payments (discussed
earlier under Disaster Area Losses). See Adjusted Basis in Pub. 551 for more information on
adjustments to basis.

Does this mean my cost basis (which is $84,901 currently (114k original minus 29k depreciation) would actually be $84901+95k for repairs? Then key in the insurance reimbursement as 143? Then FMV of 137.5 and FMV after as 42.5?

Or does this apply to something else. Doing it the way mentioned before generates a tax bill of about 11k which seems too high but maybe thats accurate?

[RobertB4444]

The math as you have explained it certainly seems accurate.

[Dengland37]

I'm still struggling with this sadly. Can anyone validate that adjusting the basis up by the cost of repairs is the proper thing to do in this situation. Everything I've read makes this point as clear as mud. 

[Dengland37]

Amy, the only thing I think I'm missing here is what to do with cost of repairs. I spent 95k of the 143k insurance proceeds. Does the 95k adjust my cost basis up or does it reduce the amount I claim on insurance reimbursement? 

[DianeW777]

Yes, you increase the cost basis by the amount you spent to restore the property ($95k per your words) as instructed.  Per the instructions you printed above from IRS Publication 547:

• Adjustments to Basis
  If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. The result is your adjusted basis in the property. If you make either of the basis adjustments described  above, amounts you spend on repairs that restore the property to its pre-casualty condition increase your adjusted basis.

You have reported the gain following the instructions provided by our awesome Tax Expert @AmyC.  This is why you can now increase your basis by the amounts you spend to restore the property back to the pre-casualty condition.

@Dengland37