How to I estimate Fair Market Value of rental property partially destroyed by vandalism

[VDR]

A  tenant completely destroyed the kitchen in my rental apartment and caused other damages to the unit.  I spent $40K to repair the damage and put a new kitchen.  I received $29K reimbursement from insurance company ($30K "Estimate of Covered Damages," less $1K deductible).

For the purpose of reporting casualty loss, how do I calculate FMV of the lost property?  Should I just use the $30K insurance estimate and record $1K loss?  Or is there another prescribed method?

Do I also need to adjust the basis of the property and if so, how?

Thank you all

[Mike9241]

i have provided a link to form 4684 - the form is used to report gain/loss of casualties to business property including rental property

look at page 2 section B part 1 line 20

what's supposed to be entered there is the tax cost of the destroyed property reduced by the depreciation taken on it

you probably have no idea what these amounts are.

on 21 you report the insurance proceeds 

22 can be a gain if insurance exceeds the depreciated cost from there unless you have other casualty losses, you now have taxable income 

I would suggest that instead of reporting it this way. You reduce the $40K you spent by the $29 K insurance and depreciate the remaining $11K 

https://www.irs.gov/pub/irs-pdf/f4684.pdf 

[Anonymous_]

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@Mike9241 wrote

I would suggest that instead of reporting it this way. You reduce the $40K you spent by the $29 K insurance and depreciate the remaining $11K 

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Yes, a simple procedure and more accurately reflects the amount of the insurance payment and out of pocket cost.

[VDR]

Thanks Mike. I initially went the route you suggested, just adding the $11K to the asset.  But I am exploring form 4684 because, when I tried it just to compare the outcomes, TT unexpectedly produced hugely different, more favorable results - I'll get to it further bellow. And also, because the pretense of the insurance might make IRS search for 4684 in my return.

But let us finish with the original question first, Form 4684, Sec. B, Pt 1, Line 20, adjusted basis of the partially destroyed property, depends on the method of calculation.  That's why I was asking whether insurance estimate is one of those acceptable methods. Depending on the method I use, I come with results ranging from $23K, which would result in taxable income, to $31K, which would produce taxable loss.  Using insurance estimate, if allowed, would give a slightly favorable result, a small taxable loss equal to $1K.

Also, if I go through the trouble of reporting on 4684, at what basis should I enter the new kitchen, $40K?

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As for why trying the Form 4684 produced more favorable results, I noticed that I ended up with much higher asset basis, which would result in lover cap. gains when sold.  After investigating, I realized that, when filling 4684, TT did NOT reduce the basis for the amount of loss.  At the same time, I enter the new kitchen onto the depreciation at its full cost of $40K.  Did I get the correct results or should TT have reduced the original basis?