Rental Casualty Loss - Basis adjustment on insurance reimbursement gain

[airKevin]

Client lost a rental house in a fire. He had owned it as a rental for several decades, so depreciated basis is now zero. Insurance settlement exceeded rebuilding cost, however we wish to postpone casualty gain by reducing basis per IRS rules in pub 547 (page 15). How is this documented, since this will reduce basis below zero?

[TaxGuyBill]

I don't think you can. You can't reduce Basis below zero. When something happens that would reduce Basis but there is not enough Basis, it ends up being taxable (for example, in an S-corporation if shareholder Distributions are in excess of Basis).