Hurricane Ian Aftermath Vacation/Rental Home

[ladylake]

I have a vacation/rental home that was damaged by Hurricane Ian.  It was considered uninhabitable for all of 2023.  I still had some expenses such as an assessment, maintenance and property taxes plus I ordered some replacement furniture which can not be delivered yet.  Obviously it was not rented at all last year not was I able to use it. Do I still prepare a Schedule E reporting the expenses I had or do I just report the property taxes (which will not really matter since I have to use the standard deduction).

[PatriciaV]

Yes, you should include Schedule E for this property, even if it wasn't rented all year. Do NOT check the box for "I did not rent, nor attempt to rent, this property at all in 20XX" or TurboTax will delete all the property information from your return. Instead, enter one rental day to preserve the historical information and allow you to take depreciation.

According to IRS Pub 527 - Vacant Property, you can’t deduct any loss of rental income for the period the property is vacant.

You can, however, continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it isn’t available for rent. (IRS Pub 527 - Idle Property)

Because the property was not available to be rented, any costs for repairs or improvements that you incurred increase the basis of the property and should be entered as a separate Rental Asset (improvements).

[ladylake]

Thank you.  This property is a condo.  Our association has approved additional assessments.  Can my assessments also be used as an expense or treated as separate depreciable assets?  I did not realize I could continue to depreciate the building and other fixed assets.  I assume also that the cost of repairs less any insurance will be added to my fixed asset list for depreciation.

[DaveF1006]

To clarify, what types of assessments are we talking about?

[ladylake]

Assessments made by the association providing for costs in excess of insurance proceeds to repair the buildings and landscaping.  These assessments are necessary to bring the property back to pre Hurricane Ian conditions.  All owners share equally in the amount of the assessments.

[PatriciaV]

If the assessments were for repairs to the common areas (including buildings & landscaping) of the condo complex, you may report your share as a rental property expense.

But if the assessments were for improvements, you would add the proportionate share to the tax basis of your condo unit. Per the IRS, "an improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses”. One of the examples offered by the IRS of an improvement that increases your basis is the replacement of an entire roof. 

@ladylake 

[ladylake]

Ask I said earlier, the assessments are needed to cover the amounts in excess of all insurance receipts.  That being said, they could arguably be allocated to almost anything that would be for improvement and repair of the buildings, and a portion for the landscaping.  Part of the assessments could be allocated to the roof and elevator replacements, to rebuild the garage storage lockers, and various building repairs (mostly maintenance) plus to replace lost landscaping and repair the pool and tennis court areas. Would it be reasonable to somehow split the total assessment amounts between building and landscaping and depreciate the building portion and directly expense the pool and landscaping portion?  Unfortunately I cannot think of a reasonable way to allocate an amount for the repairs to the building.  

Thank you for your thoughts.

[Vanessa A]

Yes, it is reasonable to split the total assessments between the building and landscaping and capital improvements.  If different people came out to assess different things like say, one came out for the roof and another came out for the tennis court, then you would directly apply those assessments to those items.

If someone came out and looked at the foundation of the building, the air conditioner, the landscaping and the swimming pool, you could take that invoice and divide it by 4 (or whatever number of items that person looked at when they came out) and then allocate based on the number of items looked at.  This would give you the amount to allocate to repairs versus capital improvements.

[ladylake]

Question 1 - I followed your advice reporting one day of rental use to maintain the fixed asset schedule and TT prepared a Schedule E.  I reported no days of personal use.  I had 2023 expenses of insurance, condo fees, marketing, assessments, professional fees and replacement furniture purchases.  When I entered those expenses in TT, the resulting Schedule E reflected those expenses and produced a loss which was carried forward as a suspended loss.  Is this correct?  If not, what do I do about the money I spent for the condo in 2023?

Question 2 - I received insurance proceeds in 2023 for loss of personal items.  I have not purchased replacements yet except furniture that I ordered in 2023 but have not yet received.  I plan to replace the other items during 2024 and they will cost more than what I originally paid and the insurance proceeds I received.  In 2021 when I purchased the items I used the De Minimis Safe Harbor election.  I realize they now have 0 basis.  How do I handle all this?

Thank you for any guidance.

[PatriciaV]

As long as you intend to offer this property for rent when it has been restored, you may deduct the cost of maintaining the property, even if this creates a suspended loss for the year. Once you have rental income, the carryover loss will be applied to reduce your taxable income.

Insurance reimbursements are generally not taxable income until you have replaced or restored whatever was covered by the insurance. Next year, you'll apply the insurance reimbursement to the Fair Market Value of the lost assets to determine if you had a gain or loss.  

For a full discussion of this topic, including examples, see IRS Pub 547 Insurance and Other Reimbursements

[ladylake]

Thank you!  I will not worry about the 2023 insurance proceeds until next year.

 Am I correct in assuming the assets will have no Fair Market Value since their basis is 0 due to the De Minimis election I used when they were all purchased during 2021?  The insurance proceeds will not fully cover the cost of replacement.  How will that affect the gain or loss?  If they have 0 basis won't they all have gain?  Then will the insurance proceeds offset that so that the net effect will either be a gain or loss?

[DawnC]

For the items expensed, the gain would be any insurance reimbursement in excess of the property's market value right before the storm.   If the insurance reimbursement doesn't cover the costs to replace the items and make you whole, there will be no gain.  There would only be a gain if you receive more than the amount needed to make you whole again.   The suspended loss on Schedule E is fine.   

Because the purpose of insurance is to "make you whole," you should generally only receive enough payment to bring you back to the state you were in before an incident occurred. You might receive a substantial payout from an insurer to fix your vehicle, but if the money is only used to repair your vehicle to its previous state, it won't be taxable.

[ladylake]

Thank you.

I looked at Pub 547.  Is it necessary that I follow the guidance on page 15 on how to postpone a gain?   It says I have gain in the year I receive the insurance proceeds.  Per the instructions, am I required to attach a statement giving details, etc.?  Since I did not replace the property in 2023 do I also attach another statement saying that I am choosing to replace the property within the required period.  I'm not sure at this time that I will, in fact, have a gain.  If I am required to attach these statements is there a way to do this in TT so I can file electronically?  Is there instead, an election to defer the gain on involuntary conversion?  Or do I file without the statements and then amend the 2023 return if I have a gain?  I find this very confusing. 

[ladylake]

Thank you.

I looked at Pub 547.  Is it necessary that I follow the guidance on page 15 on how to postpone a gain?   It says I have gain in the year I receive the insurance proceeds.  Per the instructions, am I required to attach a statement giving details, etc.?  Since I did not replace the property in 2023 do I also attach another statement saying that I am choosing to replace the property within the required period.  I'm not sure at this time that I will, in fact, have a gain.  If I am required to attach these statements is there a way to do this in TT so I can file electronically?  Is there instead, an election to defer the gain on involuntary conversion?  Or do I file without the statements and then amend the 2023 return if I have a gain?  I find this very confusing. 

[RobertB4444]

No.  You treat it all as if it is occurring in 2024, the year that you make the replacements.  All the insurance proceeds just sit until the whole process is finalized.  Then and only then do you enter it on your tax return.

@ladylake