Sale of land after house fire

[Caroleg22]

We lost our home to a fire in 2022. It was a complete loss and we decided not to rebuild. In 2024 we sold the land and received a 1099-S.  Do we have to pay capital gains on this sale considering it was the land our primary home sat on? 

[tagteam]

Did you receive an insurance payout but did not rebuild or replace the structure? If so, that figure needs to be added to your selling price.

You can certainly use the home sale exclusion (see link below) provided you qualify.

Home Sale (Publication 523): https://www.irs.gov/publications/p523#en_US_2023_publink100073574

[Opus 17]

[Edited]

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

[tagteam]

Add any insurance recovery to the $150,000 you received for the land.

What was your basis in the entire property? What was the cost of the land plus the cost of the house that was destroyed (i.e, your total cost)?

[tagteam]

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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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The house must have had a basis in addition to the land so that cost should be added to the land basis in the land and thereby reduced (but not below zero).

[Opus 17]

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@tagteam 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. 

[tagteam]

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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. 

Any insurance payout would be added to the selling price of the land and gain calculated on that figure less the total cost basis. 

I also have no idea why the sale wouldn't qualify for the home sale exclusion provided @Caroleg22 had used the house as their primary home for two out the last five years leading up to the sale of the land (i.e., house destroyed in 2022 rendering it unfit as a principal residence and the land sold in 2024).

[Opus 17]

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@tagteam 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)?

[Caroleg22]

We recieves a payout in 2023 for 370,000. We did not claim a casualty loss and did not claim it is a taxable income. Our adjuster said it was not taxable. Demolition was covered by our insurance. We had made several improvements over the years including a new roof, deck, 3 season sunroom, new floors, new windows. Of course all receipts are lost in the fire.

[tagteam]

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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. 

Are you filing a joint return with your spouse?