Fire in Rental and insurance $ money

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  • nwtaxlady
    Senior Member
    • Sep 2009
    • 418

    #1

    Fire in Rental and insurance $ money

    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
    Senior Member
    • Nov 2005
    • 4292

    #2
    The 500. is an expense on the Sch E
    Believe nothing you have not personally researched and verified.

    Comment

    • MAMalody
      Senior Member
      • Oct 2006
      • 374

      #3
      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?

      Comment

      • taxea
        Senior Member
        • Nov 2005
        • 4292

        #4
        Originally posted by 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?
        Why bother going through all of that when the only amount the TP is out is the deductible?
        Believe nothing you have not personally researched and verified.

        Comment

        • Burke
          Senior Member
          • Jan 2008
          • 7068

          #5
          Originally posted by 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?
          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.

          Comment

          • TaxGuyBill
            Senior Member
            • Oct 2013
            • 2321

            #6
            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.




            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.



            Comment

            • FEDUKE404
              Senior Member
              • May 2007
              • 3648

              #7
              Delaing with 4684 and 4797 issues

              Originally posted by Burke
              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

              Comment

              • MAMalody
                Senior Member
                • Oct 2006
                • 374

                #8
                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.

                Comment

                • TXEA
                  Senior Member
                  • Feb 2014
                  • 329

                  #9
                  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.

                  Comment

                  • Burke
                    Senior Member
                    • Jan 2008
                    • 7068

                    #10
                    I agree. This is explained completely in Pub 547. (See replacement property).

                    Comment

                    • nwtaxlady
                      Senior Member
                      • Sep 2009
                      • 418

                      #11
                      Thank you both. Makes sense to me.

                      Comment

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