Business Basis and Casualties

[Snaggletooth]

In a couple days I will encounter a client who lives in Tennessee but had rental property destroyed on Long Island during Hurricane Sandy.

Basis as rental property is very low, having been purchased 45 years ago. The market value had gone up tenfold at the time of the storm,
but client had used her low cost to depreciate against her rent.

Insurance paid nearly $400,000 to renovate the property for purposes of selling it. I am expecting the selling price to be close to $500,000
with maybe $100K left over for the client to show as proceeds.

Using the original basis, depreciated down to around $25K, the taxable gain would be $75K.

Doesn't seem quite fair, but these are the numbers. Am I correct? If you answer, please simplify by assuming no facts other than those
presented.

p.s. After wrestling with this, the plot thickens. NY has withheld tax money upon the closing of the property, so I will have to file a NY tax
as well. I know as much about NY taxes as I do about the origin of the universe...

Any help is appreciated.

[Koss]

Insurance Company?

If the property is sold for $500K, why is the seller only walking away with $100K?

You asked us to assume only the facts stated in your post. But I just don't get this. It sounds like you are saying that of the $500K sales price, $400K is going to the insurance company.

If that is the case, why is the insurance company getting that money?

The insurance company should restore the property to the condition it was in before the storm. And that is where the insurance company's role ends. I don't understand why the insurance company would be entitled to any money when the property is subsequently sold. What if the property owner chooses not to sell it?

BMK

[Lion]

I don't prepare a lot of NY returns, but they are mostly nonresident returns such as yours will be. Depending on your software, NY flows mostly from the federal return. When I have the federal complete and make entries on NY such as NR, then I like to look at the NY return on the forms, as opposed to just where I enter data. I go through the NY forms line by line to see if it makes sense, if everything I expect is there, if nothing not related to NY-sourced income, etc. Not at all sure where you enter NY W/H not on a W-2; did NY issue a 1099-G? That's probably a software question. But come back here when you need to know why something does or does not appear on NY, have specific questions.

[Snaggletooth]

Ever total out a car?

If the property is sold for $500K, why is the seller only walking away with $100K?

You asked us to assume only the facts stated in your post. But I just don't get this. It sounds like you are saying that of the $500K sales price, $400K is going to the insurance company.

If that is the case, why is the insurance company getting that money?

The insurance company should restore the property to the condition it was in before the storm. And that is where the insurance company's role ends. I don't understand why the insurance company would be entitled to any money when the property is subsequently sold. What if the property owner chooses not to sell it?

BMK

C'mon Burton, have you ever totalled out a car? An insurance company has the right of subrogation, meaning they are entitled to whatever they can get out of the car after cashing out the payment to the owner, except certain state laws prevent the insurance company from actually making a PROFIT. If they do, then the profits have to be turned over to the owner. I also imagine NY forces them to sell in the name of the owner so their greedy state can withhold income taxes on the owner, IF there is profit left over.

And somehow I KNEW this would happen (see original post). No one really answers the question as to whether the income is correct, but someone assumes some situation not in the OP and turns it into a conversation about insurance practices.

Burton, you've been a great help to many folks, including me, but you missed this time. Nonetheless, thank you for spending your time in responding to the post.

Lion, thank you as well. I don't know what I will encounter until I wade into the water.

[Golden Rocket]

Bump It Up

Going to bump this thing back up so Snag can get a response.

After his blunt answer to respondants, it's no wonder no one answered...

[Gary2]

Have you reported both the loss and reimbursement on the business side of Form 4684?

I don't think the insurance situation is comparable to an auto. With a totaled auto, the insurance company gets to keep the wreck. But I've never heard of the insurance company getting a lien against real estate for a payout. Certainly not when we had a roof leak many yeas ago, nor when we had a broken pipe last year.