casualty loss - rental house

[oceanlovin'ea]

What a season! already!!!! Supposed to be cutting back and the clients I kept all have things going on this year. Oh, well......here is the situation.

Couple turned their residence into rental property in July, got 3 months rent, then the house burned down. (They were out of state on a missionary type assignment)
Real estate market in central Florida went to pot year after they bought house. They paid $75,000 for house. FMV of house was $40,000 and land was $8500. They were upside down on house...owed more than it could sell for.
Insurance paid them around $60,000.00 plue around $20,000. for depreciation. That means they paid off the mortgage and the couple ended up with around $17,000 left which they got a check for.
Also because they had a lease agreement with tenant and lost income the insurance company gave them a check for the lost rent around $4000.

I have not done a casualty loss on rental property in all my years of doing taxes. What do I do with the money given them for depreciation. Do I just put the total from the insurance company on the casualty loss form.
I suppose that I add the amount for the lost rent to the amount they did receive for rent.
They will definitely show a gain on this sale. I just want to make sure I do it right.
Thanks for your help.

Linda, EA

[TAXNJ]

Follow

You may find your answer by following the rules outlined and seeing difference between business vs personal casualities:

https://www.irs.gov/taxtopics/tc515.html

[Kram BergGold]

Personal Residence

If there is a gain I would claim Section 121. This assumes they lived in it for at least two years prior to renting it.

[oceanlovin'ea]

Have to get this finished...help

I have never heard of an insurance company giving so much money on a claim. These are round figures:

Insurance paid around $60,000 PLUS $20,000 for depreciation. That is $80,000.00. That is way more than their basis or FMV of the house.

They also paid them around $4000 for lost rent because they had a lease agreement for 1 year.

Do I put the $4000 as income on Schedule E? I would think that I enter the total the insurance paid ($80,000.00) on Form 4684. They are going to show income on this deal...probably a lot of it.

Linda, EA

[Roland Slugg]

There is no need to make a distinction between the $60k basic recovery and the $20k additional paid for depreciation. The insurance company did that for its own reasons. The owner's insurance recovery was $80k.

The $4k earmarked as lost rent does, indeed, go on Schedule E, just as if it had been received from the tenant had there not been a fire.