I have a rental property and insurance covered replacing my roof minus the deductible. What do I include on my property assets depreciation section?

[reedkeel]

Do I include the value of the insurance deductible I paid, or do I include the value of the entire roof, regardless of who paid (me or insurance)?

[PatriciaV]

A new roof is considered an capital improvement that increases the basis of your rental property. You would create a new asset for the replacement roof with a cost equal to the difference between the total cost and the amount of the insurance reimbursement, probably your deductible.

[phantomjock]

My Company's only owned property, an aircraft, was destroyed. The depreciated value of the aircraft was less than the amount paid by insurance. The insurance payment will be used to purchase a replacement when one can be found on the open market. How do I handle this?

[KathrynG3]

Handle this in two steps.

First, report the disposition of the aircraft. Enter the insurance payment less any deductible as the sales price. TurboTax will calculate the gain/loss on the transaction.

Second, when the replacement is purchased, record your asset at the purchased price and begin depreciation.

[TXAM]

Similar situation here (tax year 2021).  However, the deductible for the new roof (my total out-of-pocket) was under $2,500. 
The screens for depreciation indicate I am required to list it as an expense, but the Help screen on the Miscellaneous Expense screen says, "Improvements to your property must be depreciated once it is made available for rent."
Which is it?  If I'm in the wrong section, please point me to the correct one.
Thanks for clarifying!

[Carl]

Typically, when you lose an asset such as in a hurricane, fire or other disaster and the insurance pays out, you simply report the "sale" of that asset to the insurance company for whatever they paid you. Then you enter the new replacement as it's own separate asset with a cost basis of what you actually paid for it. That cost basis would include both the insurance payout, as well as your deductible/out of pocket amount you paid.

However, that's not always possible in the case of losing the roof of a rental property, since the roof itself may not be listed as a separate asset from the structure. Then it's not possible to reduce your cost basis of the asset by the amount of the loss without really messing things up. In that case, you simply add the new roof as a physically separate asset and your cost basis would be your out of pocket costs, not including what the insurance paid out.   Now if it costs you less than what insurance paid you, then the difference is taxable rental income and for simplicity, can be included in the rental income.  But I don't see that as a possibility in these inflationary times.

Depreciation on the newly entered roof asset would begin once the new roof/property is placed in service. Typically this would be the day the new roof installation was completed, assuming the property remained classified as a rental during the time it took to install the new roof.

[tagteam]

Adjustments to Basis

If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. The result is your adjusted basis in the property.

If you make either of the basis adjustments described above, amounts you spend on repairs that restore the property to its pre-casualty condition increase your adjusted basis. Don’t increase your basis in the property by any qualified disaster mitigation payments (discussed earlier under Disaster Area Losses). See Adjusted Basis in Pub. 551 for more information on adjustments to basis.

See https://www.irs.gov/publications/p547#en_US_2021_publink1000225262

[Carl]

@tagteam 

 What sticks out to me is " Don’t increase your basis in the property by any qualified disaster mitigation payments "

I don't believe that an insurance payout is a qualified disaster mitigation payment. Am I wrong?

As I understand it, In the case of the roof, you would decrease your basis by the loss, then increase your basis by the cost of the replacement. In the end, there would be no loss per-se. But their could/would be an increase if the cost of the replacement is more than the cost of what was lost. The "cost of the loss" is what insurance paid out. Therefore, no loss. So the only addition to basis would be any out of pocket expense not covered/paid by the insurance.

Depending on the time of loss and time placed back in service, this could have a huge impact on depreciation. But with TTX, one would have to take the entire property out of service. Then when placing it back in service with the new roof, would have to use an adjusted cost basis. With TTX, this would require entering the property as a new asset with the adjusted cost basis that also takes into account the prior depreciation already taken with the 27.5 year depreciation starting over from  year 1 using that adjusted cost basis. (Is there some other way to do this in TTX and still be able to e-file?)  Additionally, that prior depreciation would have to be "remembered" outside of the program for recapture upon sale or other disposition of the property in the future.

My thinking on this line is because the original property asset includes the roof. As you know, if you just change the cost basis of an asset in the TTX program, it will totally skew not only the depreciation history, but the current year depreciation also. It seems to me to be one of those things that the program just flat out can't deal with "by the book".

[tagteam]

The insurance payment is not a qualified disaster payment.

I would handle it this way and this is just me (I have done this before, however).

Roof is damaged to the extent that it needs to be replaced at a cost of $100,000. Insurance covers the entire cost except for the deductible. I would (and have) decreased the basis by the amount of the insurance payout and increased the basis by the cost to replace (for a net change of $0) and then written off the deductible as an expense.

[Carl]

So with TTX, the net change of $0 means you do nothing in the program. Besides, like I said, if you change the cost basis of an asset, it messes up the depreciation stuff in the program. As for expensing the deductible, I can't see the IRS having an issue with that. Of course, if you spend more than the deductible and the amount including the deductible exceeds $2,500, I'd expect that to be a different ball game. Then there's that 2% rule thing for the safe harbor too.

[tagteam]

That would be correct about the net change in the program. 

With respect to the deductible, I would consider that on the order of a repair and expense it as such (at least that is how I actually handled a similar scenario twice in the past on the property I own; both a result of major storms).