rental fire & insurance

[krav]

Hi - I did read through all the old posts relating to rental fires, but summer must be frying my brain as I just can't quite figure this one out. Client has a rental property for 5 years, adjusted basis of $65,000. Fire destroyed the home, current FMV around $5,000. Client is getting an insurance check for $75,000 which he plans to pocket and sell the house as is (which will likely take some time to sell). I understand that there is a gain of $10,000 (ins proceeds - adj basis) which will be reported on form 4797 (some of which will be ordinary income due to depreciation) - but what happens to the basis of the rental property? It seems like it would have to lowered so as to not generate a big loss when it sells for only $5000, but this is where I am getting lost. Thanks for your any input!

[Uncle Sam]

Rental Fire & Insurance

You are confusing two scenarios. One is the reporting of the casualty - that is reported on Form 4684. The other is the reporting of the disposition of the property that is reported on Form 4797. The gain from the casualty is $ 10,000. That will restore the adjusted basis to $ 75,000, not $ 65,000.

[krav]

tax loss?

So, when the client sells the place for just $5,000, he gets a big tax loss on the sale? It just didn't sound right to me.

[Uncle Sam]

If the owner is pocketing the insurance proceeds and not using the money to improve it back to its original condition before the fire - of course the building will only be worth $ 5,000.00

[JON]

Proceeds

not used for repairs or replacement (usually 2 years unless extended) the proceeds are taxable.

[Gretel]

not used for repairs or replacement (usually 2 years unless extended) the proceeds are taxable.

...to the extend it exceeds basis.

[JON]

Basis??? Taxed if not used

it can be used to even purchase property - if no used you go back to the original year and recognize it.

You can ask for an extension of time to use it and I have never seen.heard of the request being turned down.

[Gretel]

Disagree

it can be used to even purchase property - if no used you go back to the original year and recognize it.

You can ask for an extension of time to use it and I have never seen.heard of the request being turned down.

Since I was confused on this issues I posted a question on TTB a while back, see below.

http://forum.thetaxbook.com/showthread.php?23765-Casualty-Gain&highlight=insurance

[krav]

back to basis....

So, I get the taxable portion of proceeds that exceeds the basis - but is the client's basis not affected by this? If the basis remains at $65,000 and he sells it for only $5,000 that is a large loss. Shouldn't the basis be adjusted for the insurance proceeds somehow since the client is not using the proceeds for anything?