Rent Prop. & Quit Claim Deed

[Bird Legs]

Facts. Client lives in Texas. He bought a home in Florida in 2000. Cost $71,771, which includes lot $10,000. Improvements totalled 16,983 making a total cost of 88,754.
Client was renting this home to his daughter & her husband. Home being depreciated.
For some reason, a hurricane came through in 2004 and did considerable damage to house, contents, personal property, etc. in the amount of approx. $101,000. according to the estimate. As of Dec. 31, 2004 no settlement had been reached with the insurance
co.
There is a mortgage on the house with balance of approx. $75,000.
On Dec. 27, 2004, client Quit Claim Deeded the property to daughter & her husband.
In June, 2005, client and daughter & husband go into mediation with insurance co.
Client had to go because his name was on insurance.
A settlement of $67,000. was agreed to and the insurance co. paid this amount to daughter.
Question 1: What kind of a tax situation for 2004 does my client have? Rental property, yes. Casualty loss, which occurred while title in his name but was deeded to daughter before end of year?
Have rambled quite a bit but need help---HELP. Ins. money received in 2005 did go back into house.

[S T]

I'll try

Tweet, I'll try to give you what I found.

Where are Bees, Armando, Snags, Bart, Jainen, Ed and others???

Quit Claim to daughter would be considered a gift and taxpayer (donor) would have to file Gift Tax Return.

From Pub 544

"If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income."

From Pub 547

"Insurance and Other Reimbursements
If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. You do not have a casualty or theft loss to the extent you are reimbursed.

If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. You must reduce your loss even if you do not receive payment until a later tax year.

For some reason, a hurricane came through in 2004 and did considerable damage to house, contents, personal property, etc. in the amount of approx. $101,000. according to the estimate. As of Dec. 31, 2004 no settlement had been reached with the insurance

If taxpayer owned the property at the time of the loss and the insurance policy was in his name, then it would seem taxpayer would report the loss less insurance proceeds. Maybe the insurance company had an assignment to new deed holder which is daughter, because they took so long to settle. There might have to be an adjustment made to the loss for the personal property and contents covered that the taxpayer did not own.

Thinking Taxpayer would file Sched E, form 4684 and gift tax return for 2004.

What about the mortgage of $75,000?

Maybe the above will help.



Sandy

[Bees Knees]

Rules:
- Insurance reimbursement for a casualty loss reduces the casualty loss.
- If the insurance reimbursement exceeds the basis in the property, the excess is a gain.
- If the gain is not reinvested in replacement property, it is taxable.

The question then is who lost what and who received the insurance for losing it?

Facts:
- Client owns rental property.
- Rental property suffers a casualty loss.
- Rental property gifted to daughter.
- Daughter receives insurance reimbursement.

You have to sort through the facts.

The daughter received the rental property as a gift. Therefore, the daughter’s basis in the property is the donor’s basis.

Since the insurance reimbursement was less than basis, the daughter should not have any gain on the reimbursement.

Does your client have a casualty loss?

My guess (and this is only a guess) is yes, and I believe it would be the full loss, not affected by the insurance reimbursement. The insurance was paid to the daughter, not your client. Any tax ramifications on the insurance reimbursement has to apply to the new owner who received the insurance, not your client, who didn’t receive the insurance.

Your client received no benefit from the insurance.

[Bees Knees]

Corrections:

Since I said the client receives the full casualty loss, then the client's basis is reduced accordingly. The casualty loss is limited to basis, and if the basis is less than the FMV reduction, that means the client's basis in the rental property is zero after claiming a casualty loss for the full basis in the property.

Now we get to the daughter, who is gifted property with zero basis. The insurance reimbursement is thus in excess of basis, so the daughter has taxable gain to the extent of the insurance reimbursement, which becomes the daughter's new basis in the property.

[Unregistered]

??

I don't know if this makes any difference, but who paid off the mortgage of $75,000, did the daughter assume the mortgage with the quit deed?

[S T]

Insurance Policy

The loss ocurred when taxpayer owned the property and the taxpayer also carried the insurance policy in his name. Had the insurance company paid timely, the proceeds would have been issued to the taxpayer.

In June, 2005, client and daughter & husband go into mediation with insurance co. Client had to go because his name was on insurance

So based on those facts and circumstances, wouldn't the taxpayer use the insurance reimbursement in his calculations on the 4684. gain or loss and adjust basis as necessary? Seems like taxpayer just had insurance company issue proceeds to the daughter as a matter of convenience, due to the delay in settling the claim.

Next question, from the time of the loss until the taxpayer gifted to daughter in late 12/04, how much did the taxpayer spend on repairs, while waiting for insurance company to settle the claim?

I am really glad someone else jumped in on this post!

Sandy

[Mark Goldberg]

My view

I would allocate the insurance payment to the father. Let's think about this. If the father had sold the property to you or me, you can be sure the insurance payment would have gone to the father not one of us. In this case when the insurance company cut the check to the daughter he just did not care. So I would reduce his adjusted basis by the insurance received, transfering what was left of the basis to the daughter and then increase her basis by the improvements she made with the insurance money and other funds. I know the standard operating procedure is to follow the money but in this case the money went to the wrong person and since the right person and the wrong person were related they did not bother to correct the error so treating it as received by the daughter, to me, just makes a second wrong.

[Bees Knees]

The loss ocurred when taxpayer owned the property and the taxpayer also carried the insurance policy in his name. Had the insurance company paid timely, the proceeds would have been issued to the taxpayer.



So based on those facts and circumstances, wouldn't the taxpayer use the insurance reimbursement in his calculations on the 4684. gain or loss and adjust basis as necessary? Seems like taxpayer just had insurance company issue proceeds to the daughter as a matter of convenience, due to the delay in settling the claim.

I agree with this position. I could see IRS taking my earlier position and go after the daughter for tax, but in reality, as you point out, the insurance really paid off the taxpayer, and the taxpayer chose to have the daughter receive the proceeds for the repairs. Kind of a second gift transaction.

So daughter gets house and insurance tax free.
Taxpayer gets casualty loss minus insurance reimbursement.
I'm not sure mortgage has anything to do with calculations, other than in determining the amount of the gift when transfered to daughter, assuming daughter is now paying the mortgage.

[Mark Goldberg]

One more thought

There is the possiblity that the father will have an insurance gain and not a loss. If the depreciation allowed or allowable reduces the basis below the $67,000 received from insurance there is a gain not a loss.

[ED SMITH]

Insurance

It would seem to me that the insurance company would have had the client sign an authorization allowing them to make payment to the daughter. I say this because the client was the policy holder of record and these companies have so many cya's it seems unlikely they would have made the payment otherwise. But then anything is possible.
ED