Hurricane Ian Casualty Loss for Vacation Home/Rental

[ladylake]

I have a vacation home/rental purchased in 2020 that was damaged by Hurricane Ian.  I have received approximately $90,000 in insurance proceeds.  A portion of that was for loss of use and personal property.  The decrease of the property in FMV is lower than the adjusted tax basis which includes depreciation for the rental percent.  How do I enter this in TT because it only gives me a choice of personal loss or business loss and this is actually some of both.  Also the printed Form 4684 does not print "Florida Hurricane Ian" in bold at the top as per the IRS instructions although the Form 4684 does have the FEMA code.  I am getting a large deduction on Schedule A that reduces my tax liability considerably.  I feel I must be doing something wrong.  It also appears to treat the loss as occurring as a "Qualified Disaster Loss". I was not aware that designation had been made.  Only that is is a federally declared disaster which is treated differently for tax purposes,  Thank you in advance of any help you may give me.

[tagteam]

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@ladylake wrote:

The decrease of the property in FMV is lower than the adjusted tax basis.........

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Did you reduce your loss by the amount of insurance proceeds you received?

Perhaps @Mike9241 can help with the data entry (etc.).

[Opus 17]

We need to know more about the business use of the home.  The instructions for form 4684 include special rules for when the home is partly used in business.

https://www.irs.gov/instructions/i4684#en_US_2022_publink12998zd0e813

I have never used these special rules before or tried to enter them in Turbotax, so I don't even know if turbotax includes the necessary calculations.   Someone else may know.

@Critter-3 

[ladylake]

I'm not sure how much of my response got to you earlier.  Just as I was working on it we had a tornado warning and I shut my computer down.  As I said then, the casualty loss was to my vacation home in FL which I also rent out during the winter.  I did deduct the insurance proceeds but as I said, they were a combination of loss of use (rental income), repairs and replacements to my condo and replacement costs to furniture and appliances, which had a business percentage and a personal use percentage.  I assume I need to allocate all amounts but I still don't know how to input the data because it seems to me that the input for the form is business only or personal use only.  I see your link about the special rules.  One of the reasons I have been putting off dealing with this is that I really don't know how to figure out exactly if I have a loss or a gain and how much.  I also used the de minimus elections for all assets.  I purchased the condo in 2020.  Tax year 2021 was the first year that I had rental income.

[tagteam]

Generally, if insurance proceeds have made you whole (i.e., the recovery has fully compensated you for your loss), then you have nothing to report on your federal income tax return on Form 4684. 

However, you would normally have to report that part of the insurance proceeds that were attributable to lost rental income as rental income on your federal income tax return (Schedule E, typically).

It is not clear how you determined FMV (which metric or modality), but caution needs to be exercised in that regard. I can tell you from personal experience, having also been through Ian and having made insurance claims, that the FMV of my properties actually increased after the storm. 

Finally, if you used the entire portion of the insurance proceeds that was allocated to damaged/destroyed property to effect repairs and replace personal property, you likely have neither a gain nor a loss.

[Mike9241]

@ladylake I've looked at form 4684 and instruction and Turbotax and its instructions and I have not figured out a way to enter the appropriate info.  from 4684 instructions that concerns me as to the loss you can take on the rental portion

For a home you rented out or used for a business for which you aren't filing Schedule C. see section 280A(c)(5) to figure your deductible loss. Attach a statement showing your computation of the deductible loss.  There is nothing like this in Turbotax.

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I THINK this limits the deductible casualty loss attributable to the rental portion to the net rental income with any excess loss carried over.

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Ian is not a Qualified Disaster Loss though a bill was introduced in the US House in March 2023. it has not yet been passed into law and one legislator only gives it a 5% chance of approval. 

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I would advise you to consult with a tax professional for this matter or wait to see if others have any other suggestions. 

[tagteam]

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@ladylake wrote:

I also used the de minimus elections for all assets.

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If you used the safe harbor de minimis election ($2500 or less) for personal property (assets used for your rental), then your adjusted basis for those assets is $0. Any insurance proceeds you recovered for the loss of those assets is 100% gain, which is taxed at ordinary income tax rates. 

It is becoming increasingly clear that you may not have any kind of a loss whatsoever. You mentioned FMV, but did you get some sort of an appraisal (yes, it's necessary)? Where, exactly, is your loss?

[ladylake]

Thank you for your quick response.  Unfortunately, I had already come to that conclusion.  I do plan to replace the assets with the insurance proceeds, in fact, have already started doing so.  How do I report that?  I still will have to report this loss/gain in 2022.  My question is how to I do it in TT since it is a mixed use property? The other issue in all this, is that I still am not able to begin repairs, etc. due to the fact that our building must be released by the city building department before I can move forward.  Another piece of this is that I received insurance proceeds in 2022 and 2023.  In what year and how do I report this?  Is the "loss of use" portion (all rental income) reported on the Schedule E since that is what it is related to?  I have not received a 1099 from the insurance company.  Sorry for all the questions.  I really appreciate your help!

[tagteam]

Re the repairs, you have nothing to report provided you use all of the insurance proceeds to effect the repairs so it would not matter when you received that portion of the proceeds.

You will likely have to allocate the loss of use proceeds; part to rental use and part to personal use (for loss of the time you spend at the property v. time you rent the property). The period for which you rent the property that is covered by insurance proceeds would be considered rental income and reported in the tax year in which you received that portion of the proceeds.

With respect to the personal property for which you deducted (for rental purposes) using the de minimis safe harbor election, the basis is $0 and you have to report proceeds allocated for replacement as ordinary income (which would be reported in Part II on Form 4797).

See https://www.irs.gov/publications/p544#en_US_2022_publink100084331

[ladylake]

Regarding the FMV before Ian, a condo exactly two floors below me sold in early September 2022.  I assume that would be the FMV of my unit before the storm.  Another unit in my building, same floor plan as mine, sold in April 2023 for a significant amount less.  Based on these facts, I feel the difference between these two amounts is a reasonable determination of the decrease in the FMV of my unit.  Part of the issue again is that this property is mixed-use and apparently the residential and rental portions must be allocated - which I have no problem with.  I have already calculated the percentage use for each activity which is necessary to prepare Schedule E.  With regards to Form 4684, it also seems to be a problem with TT that the software cannot accommodate a way to enter data for the two activities and to provide the necessary attachments to support the Form.  I have also concluded that I need to speak to a tax professional regarding this and it may be that I cannot use the TT software this year.  (I have been using it since 2010.). Thank you again for your valuable comments.  I'm still open to any suggestions.

[tagteam]

Re FMV, you should note that the IRS is not obligated to accept anything less than an appraisal by a certified real estate appraiser for that component. Odds are you will hear nothing if you use your own methodology, but you need to be prepared to substantiate the value (again, a formal appraisal is generally the more prudent route).

Re your claimed casualty loss, you might want to consider your time frame with regard to your ownership of the condo and any plans for the property in the future. You should note that when you sell, you will have to reduce your basis by the amount of the casualty loss you claimed. 

Finally, you should consult with a local tax professional who is well versed in dealing with casualty losses, for both personal-use and business property.

[ladylake]

Thank you for your response.  You have raised a couple of important point about a basis reduction on a future sale and substantiating the FMV's.  As far as the FMV's, I have copies of the reported sales that are from the county property records.  Currently, I have no plans to sell in the near future.   By local, do you mean a FL CPA or one where I reside which is not in FL?  If I don't claim a casualty loss what is my other choice - report the total amount of insurance proceeds as income, pay the tax, which then won't reduce my basis in the future.  Is this even possible?  I am already planning to reach out to a CPA. 

[tagteam]

In this particular situation, you might want to consider a tax professional in the area in which your condo is located as there should be a number who are dealing with this exact same (or similar) situation.

[tagteam]

I was merely pointing out that the casualty loss deduction will reduce your basis when you do sell, thus increasing your potential tax liability.

Regardless, you have to report the part of the insurance proceeds that compensated you for lost rental income and also report that part of the proceeds as (ordinary) gain for those items you deducted using the safe harbor de minimis election. 

[ladylake]

Sorry, I misunderstood why you were pointing out about the reduction of basis of the property upon a sale.  When I first read what you said I thought you were saying there was an alternate way to report the loss that would not affect the basis of the property.   As to the assets I expensed under the de minimus election, as I said earlier, I am already in the process of replacing them.  Is there a way to postpone any recognition of tax on gain (if any) when the assets are replaced since there is a good possibility some of the replacements will cost more.  I've already included the loss of use as rental income on my Schedule E.