Fire in Rental and insurance $ money

[nwtaxlady]

Client had a fire in their rental house. It was fully depreciated out. They received just less than $24,000 than they signed over the checks and went straight to the contractor for all the repair work. They were out only their $500 deductible. How is this handled on the tax return?

[taxea]

The 500. is an expense on the Sch E

[MAMalody]

Hmmm. I have never had to do one of these on a rental, however, why would not the casualty loss/gain rules apply and you would use Form 4684 for reporting purposes?

[taxea]

Hmmm. I have never had to do one of these on a rental, however, why would not the casualty loss/gain rules apply and you would use Form 4684 for reporting purposes?

Why bother going through all of that when the only amount the TP is out is the deductible?

[Burke]

Client had a fire in their rental house. It was fully depreciated out. They received just less than $24,000 than they signed over the checks and went straight to the contractor for all the repair work. They were out only their $500 deductible. How is this handled on the tax return?

If the house was fully depreciated, their basis is zero. The insurance reimbursement to the property owners should result in a gain on 4797, IMO. They were not required to repair the house or keep on renting it. If it is to remain rental property, the repairs/restoration costs would give them a depreciable basis again, would it not? Those could be more or less than the insurance reimbursement.

[TaxGuyBill]

I think Burke is right.


Publication 547: Gain from reimbursement. If your reimbursement is more than your adjusted basis in the property, you have a gain. This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. See Figuring a Gain , later.

http://www.irs.gov/publications/p547/ar02.html#en_US_2013_publink1000225228

If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Your gain is figured as follows.

The amount you receive (discussed next), minus

Your adjusted basis in the property at the time of the casualty or theft. See Adjusted Basis , earlier, for information on adjusted basis.

Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain.

http://www.irs.gov/publications/p547/ar02.html#en_US_2013_publink1000225344

[FEDUKE404]

Delaing with 4684 and 4797 issues

If the house was fully depreciated, their basis is zero. The insurance reimbursement to the property owners should result in a gain on 4797, IMO. They were not required to repair the house or keep on renting it. If it is to remain rental property, the repairs/restoration costs would give them a depreciable basis again, would it not? Those could be more or less than the insurance reimbursement.

Although I've not encountered such a situation, this comment by Burke would appear relevant.

In the "If all else fails, read the form!" scenario, looking at Section B, Part II of Form 4684 (line 39) and Part I of Form 4797 (lines 3 and beyond) would seem to indicate the answer to the original post may not be of the simple type.

FE

[MAMalody]

Well, I guess I would do the form because I have seen cases where there is an insurance reimbursement where there has been either an additional loss for the client or in a couple of cases a gain. The only you know is to do the math.

[TXEA]

Here is what you do. You attach a schedule to the tax return to report involuntary conversion.

The statement should be headed as "Statement Required under IRC Sec 1033(a)(2) (A)

Provide a description of the damaged property

Description of Damaged Property: Residential Rental
Date of Casualty: XX-XX-XXXX
Cause of Casualty: Fire

Provide the details of what happened.....

Provide the details of the restoration of the property in a paragraph.

Then show the following:

Total Insurance Proceeds: 24000
Basis in Property -0- plus land
Tentative Gain 24000 -land

Include the following statement: "The taxpayer has acquired qualifying replacement property within the required two year period by restoring the property within the required two year period. :

Then include:

Description of Restored Property: Residential Rental
Amount Spent to Restore Residential Rental: 24500

Then you show the computation of the new basis in the property:

Cost of Replacement Property: 24500
Less: Gain Deferred: -24000
Adjusted Basis 500

The gain you show should be minus land.

Hope this helps - there is no gain to report if they spent all the insurance proceeds to restore the property.

[Burke]

I agree. This is explained completely in Pub 547. (See replacement property).

[nwtaxlady]

Thank you both. Makes sense to me.