request info on completing Rental sale after insurance payout for fire.

[Username5]

@Carl  

TTax Premier 2022 Desktop

Background:
Fire at one of my residential rental properties in 2022 rendered that building uninhabitable and I received an insurance payout for total loss, including a loss rents payout.
Loss of rents was added to rental income but I decided not to try adding the entire payout to income and to try to go the sale route instead, keeping the land.

Burned building and most assets have already been totally depreciated. Adjusted basis of subject property assets = < $100.
Demolition started in mid Nov 2022 and finished in 2023 (I know I to add demo costs as land improvement).
I have a buyer for the 'improved' now vacant land which should close by Feb 2023 but because I received insurance in 2022 then the building was 'sold' in 2022 to the insurance co.
I'm trying to work through the insurance payment as a sale, keeping the land in 2022 which I'll have to revisit on the next tax year for the pending sale.

Question:
When working through the Rental Property Profile section, on the screen "Do any of these situations apply?" there is the choice "Sold" & "Converted".
The help box for "Sold" says "check if the entire interest was disposed" but since I still own the land I can't check this box, right?
Or should I check "convert to personal" use?   Or should I check both?  Or neither?

And continuing on through other sections of the program, in the Income Section there is "Sale of Business Property" and in Deductions Section there is "Casualties & Theft"
Should both sections be completed? It seems to me they may be redundant.

[Carl]

Some of the information I provide below, I know you already know. I'm just stating "the obvious" to ensure we're both on the same page here. So bear with me.

Fire at one of my residential rental properties in 2022 rendered that building uninhabitable and I received an insurance payout for total loss, including a loss rents payout.

For clarity, while it may be a total loss for the insurance company, it is not a total loss for you. This is because the insurance company only insures the structure. They do not insure the land. So basically, you 'Sold' the structure to the insurance company, and retained ownership of the land.

Loss of rents was added to rental income but I decided not to try adding the entire payout to income and to try to go the sale route instead, keeping the land.

That choice is fine, and in your case is probably the better way to go.

Burned building and most assets have already been totally depreciated. Adjusted basis of subject property assets = < $100.

Lets split up the structure and the land into two different assets, so you can actually show the sale of the structure to the insurance company in 2022, while retaining ownership of the land. You say the structure is fully depreciated. So that's what I'm going with.

Start by entering a new asset classified as residental rental real estate.

- Use the original "in service" date.

- In the COST box enter only the value of the structure

- For COST OF LAND enter zero.  This ensures the entire value of this asset is depreciated correctly so the numbers match the original entry for the property asset.

- Since you state the structure is fully depreciated, I'm expecting you to enter the same amount for "prior years depreciation" that is shown for that, in the original entry for the property asset. If there's any additional depreciation to be taken in 2022, the program will figure that, based on the date of the fire, which we'll deal with later.

Next, enter another asset classified as Residential Rental Real Estate, and again use the same in service date used for the original entry.

For COST, enter the value of the land.

COST OF LAND will be the same as in the COST box. This way, nothing on this asset is depreciated since land is not a depreciable asset.

Now at this point, you can delete the original asset that has both the structure and land in it. Then it's important you finish working through the SCH E section entirely. Otherwise, the program may not "do the math" correctly for what comes next.

Now get back into Rental & Royalty Income (SCH E) and elect to edit that property again. In the assets/depreciation section. You should see listed there an asset for the structure, and another asset for the land. Elect to edit the structure asset and work it through to report the sale of the structure only, to the insurance company for the payout (minus the loss rents already reported as rental income, of course.)

I'm trying to work through the insurance payment as a sale, keeping the land in 2022 which I'll have to revisit on the next tax year for the pending sale.

My guidance above "should" allow you to do that. For any other assets listed that were lost in the fire, I assume you know how to handle them. Myself, if the value is not all that much, I'd just indicate I stopped using the asset in 2022, and on the "Special Handling Required?" screen I'd select YES. That way, I'm showing disposition of those assets without having to deal with "sales" information. Then those additional assets can just be deleted on next year's return.

[Anonymous_]

Correct; I do not believe including that part of the insurance payout that represents the compensatory portion for the loss of the structure is the correct treatment.

See https://www.irs.gov/pub/irs-pdf/p547.pdf

You may clearly have a gain as a result of the payout, but it would seem to be proper to report the payout representing loss of rent as rental income while reporting the payout representing the loss of the structure as a "sale".

The land can be converted to personal use in the program because it only affects the program's worksheets. If you continue to hold the land as an investment and later sell it for a loss (most likely that would be unusual), the loss can be recognized regardless.

[Username5]

@Carl 

You wrote:  

Next, enter another asset classified as Residential Rental Real Estate, and again use the same in service date used for the original entry.

For COST, enter the value of the land.

COST OF LAND will be the same as in the COST box. This way, nothing on this asset is depreciated since land is not a depreciable asset.

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At this point I run into a problem, the same problem that caused me to post the query yesterday.

"Tell us more about Rental Asset".   I select I purchased this asset.

"Used this item 100%?".    Yes, and add date for 1990.

Select continue and....

Next screen "Data may be incorrect".  My choices are 'back' or 'delete'.

I checked forms and the "depreciation report" correctly added the above but regardless I cannot proceed within EasyStep.  And confirming that the Land has been $16k of the original purchase price through many years of filing with TTax.

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So why am I hitting a wall here?

[Carl]

I did some testing, and see that it "appears" the programmers have changed things so that COST must be at least $1 more than COST OF LAND.

For my testing, I entered $30,001 in the COST box, and $30,000 in the COST OF LAND box. Then it went through with no problem, showing $0 prior depreciation and $0 depreciation for current year. That'll work and "the numbers" should be fine assuming you actually sell the property in 2023.

One thing you can do also, is go ahead and include any unclaimed depreciation on other assets, in the cost of the land, as well as your demolition costs too, since none of that cost gets depreciated anyway.

[Username5]

Thank you, that sounds great!

And to clarify, you are suggesting that in the prior screenshot of "Tell us more" rather than make an additional entry, I can include the single remaining asset with a deprec =<$100.  But I still have to loop on through all the other fully deprec entries.  And then delete all those entries leaving me with my 2 new asset entries.

Finally, what about the  section on "Sale of Biz Property"?  I believe I need to complete that, correct?

I'll check this all out tonight and hope I don't need more advise.  

[Username5]

@Anonymous_ wrote:

"

You may clearly have a gain as a result of the payout, but it would seem to be proper to report the payout representing loss of rent as rental income while reporting the payout representing the loss of the structure as a "sale".

The land can be converted to personal use in the program because it only affects the program's worksheets. If you continue to hold the land as an investment and later sell it for a loss (most likely that would be unusual), the loss can be recognized regardless.

Thanks for this confirmation that I am proceeding on the correct path.  You are correct that I will most certainly have a gain and I'm trying to get an idea this week of what the hit will be so I can meet the 4th qtr payment deadline.  It's been a real roller coaster ride but I'm getting close to the end and can fine tune it all next month.

[Username5]

@Carl 

that COST must be at least $1 more than COST OF LAND.

That looks good to me.  And TTax automagically populated the Sale of Biz Property saving my a headache.

Thanks so much for you assistance.

[Carl]

A few things that occurred to me overnight.

Since you've now got the land and the structure split as two separate assets, you can also just convert the land to personal use if you want. All the information will still be retained in the program. since there's no depreciation involved with the land, it won't affect anything, even when you report the sale of that land on next year's tax return. In fact, I think that would be the better way to go. But I really don't see any issues with what you have already. Up to you.

[Username5]

@Carl You wrote:  it won't affect anything, even when you report the sale of that land on next year's tax return

When I looked at TTax for the Land Asset, Special Handling, "Convert to 100% Personal Use", the "Learn more" box says  "If during the time you used the asset for business your percentage of business use was less than 100%, you will have two sales to report".

Is this going to apply to my situation of selling non-depreciable land in 2023?  Or is my situation specific enough that this is not applicable.  As a converted asset I presume next year it will be reported in the Investment Income section.  

If I have to report it twice then it seems like converting it has no advantage, or am I missing something?

Thanks again for all the help and tips

[Carl]

When I looked at TTax for the Land Asset, Special Handling, "Convert to 100% Personal Use", the "Learn more" box says "If during the time you used the asset for business your percentage of business use was less than 100%, you will have two sales to report".

Well, you are "in fact" reporting two separate sales. You sold the structure in 2022, and will be selling the land in 2023.

Is this going to apply to my situation of selling non-depreciable land in 2023? Or is my situation specific enough that this is not applicable. As a converted asset I presume next year it will be reported in the Investment Income section.

Either way, the sale will be reported on  your 2023 tax return in the investments section. The important thing here, is that you will need the cost basis of the land when you report the sale on the 2023 tax return. If you just convert the land to personal use, make absolutely certain you print out the 4562's that print in landscape format. Those 4562's will have the original cost basis information on them, which you'll need for the 2023 taxes. Basically, you'll be adding your demolition cost and any other unclaimed depreciation on other assets that were lost in the casualty, to that cost basis for the land when you report the sale in the investments section.

If after converting to personal use, the SCH E data is imported for that property on the 2023 return, you can just delete it from the 2023 return since you'll be reporting the land sale in the investments section. anyway.

If I have to report it twice then it seems like converting it has no advantage, or am I missing something?

[Username5]

@Carl Thanks so much for the excellent help.