Rental property had fire in 2016, repaired after tenants moved out, and then sold in 2017

[mint1]

We have a rental property which was rented approximately half of 2016.   In May there was a small kitchen fire and we received an insurance settlement.  The lease was through the end of June but the tenants chose to move out mid-June.  I did not advertise for rent, opting to use the insurance money to fix up the rental and sell it.  It did not close until 1/27/17.  So my questions are: 1) Is it considered a rental all of 2016 even though it wasn't advertised?  2) If so, do I deduct repairs, utility payments, mileage, etc. as expenses?  How do I determine a repair vs. an improvement?  3) Is the insurance settlement considered rental income, or personal income, or neither?  4) When I use a credit card to pay for repairs and improvements, is the CC transaction date the correct date to deduct them?  Thank you

[MichaelDC · Accepted solution]

1.)  For the rental days, use from the beginning of the year until the end of June. Zero personal days.

2.) The expenses paid after June should be added to the cost of the property (Increase in basis). The question of repair vs. improvement will be irrelevant at that point.

3.)  The insurance settlement proceeds will reduce the basis of the property. You should fill out a casualty and theft Form 4684 for the fire. This deduction covers property that’s damaged as a result of a disaster, such as a storm, flood, fire, car accident, or similar event, and also covers stolen property. Property includes anything you own.

You can also claim this deduction for losses related to property used in a business such as a rental, and you might also be able to deduct appraisal fees related to casualties and thefts. We do all the calculations for you, so all you’ll need to do to is enter your loss information.

https://ttlc.intuit.com/questions/1901178-casualty-and-theft-losses

4. The date that you pay for the services/supplies with a credit card or otherwise, is the date that you use, i.e. the date on the contractor/supplier receipt.

Basis adjustments

Depreciation, since it has to be recaptured, must be subtracted from the basis, giving you a bigger gain in the form of the depreciation you took.

If you are selling rental property, the calculations should be done for you by the program.

For a chart of additions and subtractions to basis, please see the chart provided by the link below.

https://www.irs.gov/publications/p17/ch13.html#en_US_2016_publink1000172171

[mint1]

This is very helpful - Thank you!  As a follow-up question, what about utilities paid during the vacant period?  They are not improvements to the property.  Can they be deducted as a rental expense during the time the property was empty and being renovated?

[MichaelDC]

More than a pleasure. Play it safe and add it to the basis (as if it's part of the improvement). Good luck!

[Cave-Man]

What if the loss (fire) is in 2016 and the insurance pays on 2017, how do you report it on form 4684? Form 4684 is asking for date of loss and asking for insurance payment.

[amycp7]

Hi - If all the money from the insurance settlement was used to repair the home (none kept for self), does that still reduce the property basis? So if I paid 150k for my home originally, but had a big fire, the insurance paid 100K to repair my home, would my new basis be 50K? If I sold the home and because of the improvements I was able to sell it for 200K, would I then have to pay gain taxes on 150K? 

[TomYoung]

@amycp7 

If the insurance payout simply put you in the same situation as before the fire occurred - your property is restored to essentially its original condition, you don't have anymore "cash in pocket" then you did before - your basis in the property is unchanged. 

[amycp7]

If the home value increases due to the repairs, would that increase my basis or would it remain the same. This is for a rental property, not personal home. 

[Carl]

I can see why you're a bit confused here. Hopefully I can help clarify things. This applies to the 2016 return.

 - First, the property should be classified as residental rental real estate up until the day you sold it. It's legal for you to do so, and it makes the paperwork a *LOT* simpler and easier.

 - You will not report one single penny of the insurance payout on the SCH E. That gets done elsewhere.

 - You will not report one single penny of loss due to the fire on SCH E either. That will be done elsewhere.

 - Work through all rental assets and mark them as removed from service for personal use, on the date of the fire.  On the "special handling required?" page, select YES.

 - Your repairs to the rental property are not really "repairs" per-se. They are property improvements and get reported as such. Your cost for that gets entered in the assets/depreciation section. If after the property was all fixed up, you did "NOT" rent it out, then when entering the asset, your percentage of business use will be ZERO. That means no depreciation will be taken on that asset, since the fact is, it was never used to generate income.

One final note of significant importance on the insurance payout. Generally, a rental dwelling insurance policy will also provide for up to 85% of "lost rent" for anywhere from 6 months to a year. You ***MUST*** report that portion of the payout as rental income on the tax return for the tax year you physically received that payout. It *is* taxable rental income, so must be included in the rental income received for the tax year the insurance paid it to you. There should be a breakdown of the payout amount provided to you by the insurance company that shows you the exact dollar amount of the payout that was for lost rent.

- Now to account for the loss, you say only the kitchen burned. We still have to deal with that on the SCH E. But I'm not doing so at this point yet, so as not to add to the confusion. Basically, you will have what is called a "reduction in basis". I'll discuss that in another post if you need me to.

 All the above applies to the SCH E. Next, I discuss the losses and the insurance payout.

 - You will claim your loss under the Deductions & Credits tab in the Casualty & Thefts section. You'll deal with the insurance payout in there also. Pay attention to detail ans the small print on each screen as you work this through. *It* *matters* *big* *time* for correct reporting.

would that increase my basis or would it remain the same.

It would most likely increase the basis. While it's possible for it to remain the same, I doubt that will happen. It will definitely not reduce the basis though. We'll get to that after I know you understand all the above, and we cover the method of reducing the basis on what burned. Slow and easy I say. One step at a time.

[Carl]

@mint1 I see you originally posted back in June of 2019. I just ran across a writeup I did last year of your *exact* scenario. So if you still need it let me know. All I need is some numbers from you and I'll "plug them in" to my writeup and post it. Otherwise, If you've already filed those old returns there's no sense in doing this.