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    rental fire & insurance

    Hi - I did read through all the old posts relating to rental fires, but summer must be frying my brain as I just can't quite figure this one out. Client has a rental property for 5 years, adjusted basis of $65,000. Fire destroyed the home, current FMV around $5,000. Client is getting an insurance check for $75,000 which he plans to pocket and sell the house as is (which will likely take some time to sell). I understand that there is a gain of $10,000 (ins proceeds - adj basis) which will be reported on form 4797 (some of which will be ordinary income due to depreciation) - but what happens to the basis of the rental property? It seems like it would have to lowered so as to not generate a big loss when it sells for only $5000, but this is where I am getting lost. Thanks for your any input!

    #2
    Rental Fire & Insurance

    You are confusing two scenarios. One is the reporting of the casualty - that is reported on Form 4684. The other is the reporting of the disposition of the property that is reported on Form 4797. The gain from the casualty is $ 10,000. That will restore the adjusted basis to $ 75,000, not $ 65,000.
    Uncle Sam, CPA, EA. ARA, NTPI Fellow

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      #3
      tax loss?

      So, when the client sells the place for just $5,000, he gets a big tax loss on the sale? It just didn't sound right to me.

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        #4
        If the owner is pocketing the insurance proceeds and not using the money to improve it back to its original condition before the fire - of course the building will only be worth $ 5,000.00
        Uncle Sam, CPA, EA. ARA, NTPI Fellow

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          #5
          Proceeds

          not used for repairs or replacement (usually 2 years unless extended) the proceeds are taxable.

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            #6
            Originally posted by JON View Post
            not used for repairs or replacement (usually 2 years unless extended) the proceeds are taxable.
            ...to the extend it exceeds basis.

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              #7
              Basis??? Taxed if not used

              it can be used to even purchase property - if no used you go back to the original year and recognize it.

              You can ask for an extension of time to use it and I have never seen.heard of the request being turned down.

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                #8
                Disagree

                Originally posted by JON View Post
                it can be used to even purchase property - if no used you go back to the original year and recognize it.

                You can ask for an extension of time to use it and I have never seen.heard of the request being turned down.
                Since I was confused on this issues I posted a question on TTB a while back, see below.

                Primary Forum for posting questions regarding tax issues. Message Board participants can then respond to your questions. You can also respond to questions posted by others. Please use the Contact Us link above for customer support questions.

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                  #9
                  back to basis....

                  So, I get the taxable portion of proceeds that exceeds the basis - but is the client's basis not affected by this? If the basis remains at $65,000 and he sells it for only $5,000 that is a large loss. Shouldn't the basis be adjusted for the insurance proceeds somehow since the client is not using the proceeds for anything?

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