Rental property fire damage

[Punky2]

I have a rental property that had fire damage in July 2021. I filed insurance claim and hired a contractor to restore the damage to the kitchen and the rest of the house. I did not claim casualty loss for 2021, so I need to amend my 2021 return. Insurance paid for lost rent, which I included part in my 2021 return and the rest will be included in rent income in my 2022 return.

Events timeline:

2021:

1. Kitchen fire in July
2. Insurance claim filed and contractor hired to clean and demo the damaged area of the house
3. Insurance paid for boarding, cleaning and demo (completed in 2021), lost rent, and their estimate of the restoration cost (about 30K), which was half of what contractor had estimated (about 75K). I paid half of the contractor’s restoration cost estimate (about 35K)

2002:

1. Insurance paid another 32K for restoration in July
2. Contractor completed restoration in July; I made the final payment (40K) to contractor
3. My out-of-pocket cost of restoration was 10k plus 1k deductible

Except for cleaning the fire damage and gutting the damaged area, restoration did not start until 2022 and the work was not completed until July 2022. Insurance payout for restoration was not a single lump sum. They paid about half in 2021 and the rest about a year later in 2022. I paid about half of the restoration cost to contractor in 2021 and the rest in 2022 after completion of the work.

My questions: how should I handle insurance payout that was done partly in 2021 and partly in 2022. If I include insurance payments as income but depreciate restoration, wouldn’t that cause large tax liability for me? And how to account for payments I made to contractor in 2021 and the remaining payment made in 2022 (that is, where these payments go in TT)? How to depreciate property after restoration. Restoration included new appliances, new floor, new windows, etc. Do I need to depreciate individual items or the restoration as a whole? Thank you in advance for all your help.

[tagteam]

Stay tuned as I page Champ @Mike9241 whom I believe is familiar with 1033 issues.

[Punky2]

Is this really 1033 issue? I did not have total loss. The house became available for rent in July after restoration was completed, and all the insurance payouts were spent for restoring the property.

[GeorgeM777]

No, don't include the insurance reimbursement payments as income.   You are correct in that you will need to amend your 2021 return to include your casualty loss.  When calculating your casualty loss, include in that calculation the total amount of insurance reimbursement you received.  Here is the formula you will need to use when calculating your casualty loss:

Take the lesser of: 

• the decrease in the property's fair market value due to the casualty, minus any salvage value and insurance proceeds, or
• its adjusted basis less insurance proceeds. 

The amounts you paid the contractor are a rental expense and should be reported in the rental expense portion of TurboTax.  Regarding depreciation, because the restoration included different assets, such as appliances, floor, and new windows, those different assets are depreciated over different time spans.  For example, you will recover the cost of the new appliances sooner than the cost associated with the new floor.  Therefore, each asset will have its own depreciation schedule.  Do not add all of the new items together and take depreciation based on the total dollar amount of all new items.  

@Punky2

[Punky2]

Thank you so much George.

[fgrentalproperty]

Hi @Punky2 , I'm now in a very similar situation as you were. My rental property had a fire damage on January 2023. Then in 2023, for boarding, mitigation, gutting everything, insurance company directly paid the contractors. I also got 200k payment from insurance company for restoration. However, right now we're still negotiating with insurance company and hasn't started the rebuild yet. I'm trying to figure out how I should input this 200k payment in my 2023 tax return. I certainly don't want to put this as income. In addition, I haven't paid any contractor yet in 2023.

In your case, where did you input the 30k you received for restoration in 2021 in turbotax, and what about the 32k insurance company payment in 2022?

Thanks!

[RobertB4444]

For right now you won't input anything.  This is an ongoing project and you won't enter the details til it is finished.  For 2023 you will not have a rental home.  You'll just skip the entry for this year.

@fguome