Casualty Gain on a Rental

[jcdt]

Rental property fire occurred July 2016

Received insurance proceeds approx 625000 in 2016

Purchase price 174,000. Contents 50k.

Depreciation around 50k

Property was sold in 2017 for about 150k

Can I defer the gain until the sale in 2017?

[Clemrick]

Too many 0s?

Was the insurance really $625,000?

[jcdt]

Yes, she received 625,000

[Snaggletooth]

Going Out on a Limb

I am going out on a limb and offer an answer.

If this was a casualty, I believe you can reduce the basis of the property by the insurance proceeds.

It appears there is not enough basis to accommodate the insurance proceeds, so I believe you can reduce the basis to zero, but the excess would have to be reported as long-term capital gains in 2016.

If the property was sold in 2017, then due to the above, his basis is zero, and the entire net proceeds would be reportable in 2017 as a capital gain, sounds like it is long-term.

[JudyL]

It all depends on if replacement is planned and acquired

Rental property fire occurred July 2016

Received insurance proceeds approx 625000 in 2016

Purchase price 174,000. Contents 50k.

Depreciation around 50k

Property was sold in 2017 for about 150k

Can I defer the gain until the sale in 2017?

The reimbursement is considered dissimilar property, and it is possible to defer IF the client acquires replacement income-producing property within 2 years after the year the gain is realized and spends at least as much or more than the insurance reimbursement received. If replacement property isn't aquired in this 2 year period, the gain should be recognized in the year realized, and that would be 2016 in your client's case.

If replacement property is NOT acquired, any portion of the gain in 2016 that is from depreciation recapture is taxed as ordinary income, then the excess would be LTCG.

The second part of this transaction, if replacement property will not be obtained within the 2 years allowed, is the sale in 2017 that would be all pure profit because there is no remaining basis to apply against the net sale proceeds, and that gain would all be taxed as LTCG.

The instructions to 4684 are pretty good on this. Look under the heading "Gain on Reimbursement" and also in Pub 547 if your client will be replacing.