Basis of destroyed rental

[Ray]

I have a client who has a rental house and has been renting for some years now. She had a fire in 05 that completely destroyed it. It was depreciated down to a basis of $36,000 and the insurance company gave her a check for $107,000. At first I showed her a taxable gain of $71,000 (107,000 - 36,000).

She is rebuilding and I am thinking that I should just take the new building and show a basis of $36,000 rather than have her take a gain of $71,000 and pay an additional $12,000 in taxes.

What is the correct way to handle this?

I appreciate your help.

Ray

[Koss]

Replacement Property

The following text is a direct citation from IRS Publication 547, Casualties, Disasters and Thefts:

You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later.

You'll need to research this a bit futher, but it looks like your intuition is correct. The massive capital gain is not fair if the insurance reimbursement is immediately rolled into the cost of replacing the property. It almost has the structure of Section 1031 like-kind exchange. The gain is postponed by subtracting it from the cost basis of the new property.

I'm not sure what the reporting requirements are on this sort of thing.

Burton