How to report Insurance claim proceeds and drying/repair costs after burst toilet tank flood of rental

[Dg163]

We had toilet tank crack and leak through multiple floors of a single unit rental property.  Collected over several months for loss of use, water damage, repair  for walls/floors and 19 days of drying/dehumidification.  Insurance has so far paid about half of drying and repairs but all of loss of use.  Expenses and insurances proceeds straddle two tax years and claim likely still to be argued further and at least one vendor coming to us for payment while insurance company delays / low balls.    We did a lot of the repairs ourselves, and delayed some as tenants wanted to more in once dry even if not fully repaired yet.  

Schedule E doesn't seem to invite entries for insurance proceeds.  We report on cash basis.  Scale of claim damage approaches 3 years of rental income.  

Are insurance companies payments taxable when received, if so where reported?

Are repairs of this scale capitalized or treated as repairs given scale of damage?  

Sense I am asking wrong, seems this would be a common problem - damage to rental property partially recovered by insurance.

"Dg163"

[DianeW777]

It depends. Most often, it would not be taxable income.  The payout from an insurance policy that you are paying for only becomes taxable income when it results in you being in a better financial situation than you started. Currently, that doesn't seem to be the case for you. 

Any amounts received from the insurance company that represents a loss of rental income would be rental income.

Capital improvements would be a new asset only if you do more than just put it back to it's original condition immediately before the leak. See IRS Publication 547 about Insurance and Other Reimbursements

Expenses for such things as drying/dehumidification would be expenses and again, reduce any expenses by the amount of insurance proceeds for those maintenance items. Only deduct expenses above the amount you were reimbursed for such things.

Any payments received in future years would be considered income on your rental activity.

[Dg163 · Accepted solution]

Thank you DianeW777.   Good mix of pointing to IRS publication for more details and covering the theme for insurance proceeds are income only to extent they exceed expenses incurred.   The distinction on capitalization of repairs only when past the condition before the flood is useful detail but will be at best fuzzy.  Been doing taxes for decades but insurance claim of this scale was challenging us.   Your answer gives us enough guidance to move forward. - Dg163