rental uninhabitable after fire, 4684, 4797, & 4562 questions

[Username5]

I received insurance payout for total loss of rental due to fire and is accounted for on 4684.  Nothing will be done during the tax year regarding disposal or sale.  I received 'loss of income' insurance payout which I will include on Sked E as rental income.  Regarding the payout for the building:

4684 has FMV questions.  Does the FMV exclude the land value?  I presume it does.  Is it correct that fmv after loss is zero, even though I still possess the burnedout structure and land? 

The building & improvements, except roof, are fully depreciated.  The roof is the only item still being depreciated (5 yrs remaining).  On 4684 I am using the total depreciable basis from the Depreciation Report as a single entry rather than breaking out each asset as a separate entry since the building is considered a total loss.  Is this correct?

When working through "Casualties & Thefts" the annual depreciation of roof is carried over on the Depreciation Report.  Shouldn't it revert to zero as a loss?  If so, how do I do that?  

The asset entry worksheet for every asset, excluding the roof, show a disposition date of the fire with blank data for sales price, this seems correct to me but the roof is handled differently by TTax and creates a 4797 entry which I believe is not correct because the form sez "other than casualty or theft".  I cannot figure out what I have done incorrectly that TTax created that entry.

Would appreciate some feedback so I can get this sorted out.

[M-MTax]

Sec 1033. https://www.law.cornell.edu/uscode/text/26/1033 - 2 years to replace.

[Carl]

You are correct. But I will reiterate things just so I know I"m on the same page. Will also try to help with the roof depreciation.

What is a "total loss" to the insurance company, is not a total loss to you. The insurance company only insured the structure - not the land. Basically, just to put it in simple terms, you sold the structure to the insurance company, but you still own the land. The cost basis of the land will not change for you.

Here's but one way to deal with the roof in TTX.

Indicate that the roof was removed from service (converted to personal use, I think) on the date of the fire. As you work through the asset you'll come to a screen for "Special Handling Required?". Read that screen to understand why I'm telling you to select YES, then select YES. This way, you will show disposition of that asset without being asked for a sales price. As for handling the remaining depreciation on the roof, I get the impression you've got a handle on that already.

[Username5]

I understand I will have to recognize a gain.  I am trying to find out the specifics I mentioned in my query so that the tax filing is correct.  My intention is to have the remains of the rental building demolished and I will then attempt to sell the vacant land.  I have no intention of rebuilding or buying something else.

[M-MTax]

Then show the insurance recovery as the sales price. There's going to be recapture of depreciation and cap gain I assume.

[Username5]

@Carl Thanks,  I understand the part about the insured structure.  I also believe that when I eventually complete the demolition sometime in the future, that cost will increase the basis of the land.  There are many different replies in the TTax Community on how to handle this.

I have gone to the "special handling" page, but not specifically in regards to converting to personal use.  I will check your suggestion out.  Since the roof was damaged by fire I fail to grasp that it is different from anything else regarding the building having become a "total loss".   I do understand that the land is not part of this.  

Still wondering why I have an entry on the 4797 regarding "other than casualty" when it is clearly a casualty.  I do not know where this data entry originated within the program.

[Username5]

@M-MTax 

Yes, there will be recapture & cap gain.  I do see cap gain in the forms but I do not see the recapture.  I never did understand recapture but know it exists.  This property has been fully depreciated, I've owned it 30+ yrs.  TTax creates 4684 for me and prompts for the insurance payout.  That does not seem to be the same as a sale.  Maybe that is the piece that I am missing because my results are not showing the tax hit I was expecting.  If I call it a sale then I should not go down the casualty route?  Or do I have to do both?

[Carl]

I've always suggested/recommended one take the sale path. It's rather tricky though with TurboTax, because you have to separate out the structure and the land, since you're not selling the land. But it's perfectly doable.

You just work through the existing structure/land asset. You reduce the "COST" by the value of the land, then enter a zero for the value of the land. That keeps the depreciation along with the depreciation history in check.

Then you enter a new rental asset making the COST and COST OF LAND boxes the same. That way, there's no depreciation on the "land" asset, and it's still accounted for. You still use your original acquisition/conversion dates too.

Then you allocate your "sale" price (the insurance payout) between the structure asset and the separate roof asset. When done, you'll still have the land. If you sell later down the road (the two year thing applies, I think) then you'll report the separate sale of the land in the tax year you actually sell it.

Otherwise, if you rebuild and immediately place it in service, you simply enter an entirely new rental property with your COST being the original cost basis of the land, plus your rebuild cost. Then the COST OF LAND will be that original cost basis. Depreciation will start anew from year one, and you can then completely delete the "old" rental which is only keeping track of the non-depreciated land anyway.

[M-MTax]

Note sure why you need a 4684. Allocate the insurance proceeds between the building and the roof. You said the building and roof are fully depreciated so it should be easy as your basis will all be recaptured. All of this will get entered on your 4797.

[Carl]

You said the building and roof are fully depreciated

That's not what I saw. In the original post, it's stated, "The roof is the only item still being depreciated (5 yrs remaining)."

[Username5]

@Carl I'll look at that again.  I have no intention of rebuilding due to my advanced age and with the difficulty I'm having finding someone to demolish this structure I doubt I can use the 2 yr deal.  The depreciation schedule already has the land/asset broken out so I don't see that as a problem.  Earlier I did work through the sale method but probably missed a few details that you have filled in for me.  It was during later reading on these forums that I found out about casualty entries and decided I was going down the wrong path and started over again going that direction.  I guess there is more than one way to correctly skin this cat.

[Username5]

@Carl.  Sorry, you read correctly.  Typo.  Roof has 5.5 yrs remaining (27.5yr SL method) on depreciation schedule.

[Carl]

I guess there is more than one way to correctly skin this cat.

There is. Basically, with a total loss declared, you've basically "sold" the structure to the insurance company.

If your intent is to sell it, whatever proceeds you spend to clear the land can be added to the cost basis of the land. That will help reduce your taxable gain on the sale of that land if/when you sell it later. I assume the fire and insurance payout was in 2021, and if selling, the land sale will occur in 2022 or 23. My method allows you to treat the separate sale of the land in a later tax year, as the sale of a business asset since that it what it was used for prior to the fire.

[M-MTax]

Misread something but it changes nothing.....report the "sale" on form 4797. 

[Username5]

@Carl Thanks, that method sounds like I first read things a few months ago (maybe those were even your posts I read at that time).  I later read about casualties and started down a more confusing path.  Actually, the events took place this past July and I'm using TTax 21 as a "what if" condition so that I can make sure I don't have a huge underpayment (cap gain w/ recapture) and incur a penalty.