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[alyssaking92]

Did you get an answer from a local professional on this like you stated? I'm curious as I went through a very similar situation and am trying to figure out what if anything I need to be including in my income.

[KrisD15]

If you lose your home in a fire, the insurance (if any) will only reimburse you for the building. 

However, I think you would still have a basis for the land. 

If you sold soon after, you would get the Home Sale Exclusion (250,000/500,000) above the basis of the land. 

If you purchased the property for 100,000 and the building was worth 95,000 while the land was worth 5,000, you could in theory sell the land for 505,000 and not need to claim the income if Married Filing Jointly. 

There would be a time limit for selling the property and claiming the exception to capital gain, just as there is if you had a house and left it vacant.  

@Caroleg22

@alyssaking92 

[Opus 17]

@alyssaking92 

The answer to this is very simple and has already been given.  This thread is confusing because the original poster did not supply all the facts at once.

Let's consider a very simple case.

Suppose you buy a home for $500,000 and sell it for $800,000.  You have a $500,000 basis and a $300,000 capital gain.  You might be able to exclude part of the gain if this was your personal home, but the gain is there.

Now suppose the house burns down and the insurance company pays out $700,000.  You have essentially "sold" the house to the insurance company for $700,000.  Because the basis was $500,000, you have a $200,000 capital gain, and your basis in the land is reduced to zero.  Now you sell the land (without rebuilding) for $100,000.  Because your basis was reduced to zero by the insurance payout, the entire $100,000 is a taxable capital gain (although you might be able to exclude part of the the if it was your personal home.)

In both cases you had a $500,000 basis, you "sold" the house and land for a combined $800,000, so $300,000 is taxable capital gain.

If you rebuilt the house "as-was", your basis would remain the original $500,000 basis no matter how much the insurance company paid to rebuild, and that basis would follow you until whenever you decided the sell the house and land.  

[Opus 17]

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@KrisD15 wrote:

If you purchased the property for 100,000 and the building was worth 95,000 while the land was worth 5,000, you could in theory sell the land for 505,000 and not need to claim the income if Married Filing Jointly. 

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In your example, the maximum combined sale price for the house and land to not be taxed is the basis plus the exclusion minus the insurance payment.  

Because most people have replacement cost coverage, it is very easy to get paid more than your basis.   Suppose you bought the house years ago for $100,000 but the insurance company pays replacement cost at today's prices of $200,000 and you don't rebuild.  Your basis is reduced to zero and $100,000 is a capital gain.  Then if you sell the land, you have an additional capital gain. (These gains are still covered by the exclusion rules if you qualify.)   Or, if the land must retain a basis, when the insurance pays $200,000, the land retains a $5000 basis but the gain from the insurance payout is $105,000.   Then the gain from the sale of the land is the selling price minus $5000.  The net gain from the combined sales ends up the same.  

[Opus 17]

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@Caroleg22 wrote:

I have not spoken with a professional yet. However, I did find a worksheet in the TurboTax Premier edition on the sale of your home that factors in a fire loss and insurance claim when selling your home.  Based on that information, my home basis was zero, so the sale of $150,000 would be non-taxable. I will probably still consult an accountant to make sure I am understanding everything correctly.

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I would like to see the worksheet you used because I think you misunderstood it.  If you have zero basis in a piece of property, and you sell it for $150,000, you have a capital gain of $150,000.

You might be able to exclude the gain from your income (make it not taxable) if it was the sale of your personal home and you meet certain time limits, but the gain is still there.