Building destroyed by fire.

[ED SMITH]

Same client as before. The building on his property, that was refinanced for $750K was destroyed by fire in the middle of 2000. The building was never rebuilt. About a third of the depreciation had been taken.

What happens to the mortgage interest which was paid up to the time of sale in 2004, and the depreciation between 2000 and 2004?

[Ken]

very confusing

You say the building was destroyed by fire in 2000, and then you ask what happens to the intrest that was paid up untill the time the building was sold in 2004. This whole thing doesn't make sense to me.

[ChEAr$]

Sounds like

You say the building was destroyed by fire in 2000, and then you ask what happens to the intrest that was paid up untill the time the building was sold in 2004. This whole thing doesn't make sense to me.

the question is "may the depreciation on the building after the fire and mortgage interest stil be
deducted.

[JON]

Need more info

how does mortgage not get paid off by insurance proceeds from the fire. You compute the gain or loss from casualty-it is too late to roll it. I have never seen a commercial mortgage where the lender is not named as the payee on the proceeds. If the building burned down there is nothing to depreciate. You have land left which will be increased by clean up maybe. I think you have a gain or loss recorded when the fire happenned - nothing left to depreciate and you have land left to sell.

[ED SMITH]

You say the building was destroyed by fire in 2000, and then you ask what happens to the intrest that was paid up untill the time the building was sold in 2004. This whole thing doesn't make sense to me.

The building was not insured sufficiently to cover the mortgage - payments on the mortgage were made up to the time of sale. The 2004 closing statement shows a payoff of $700,000 on the loan.

[ED SMITH]

the question is "may the depreciation on the building after the fire and mortgage interest stil be
deducted.

That's it Exactly!

[ChEAr$]

But we're all dying to know

The building was not insured sufficiently to cover the mortgage - payments on the mortgage were made up to the time of sale. The 2004 closing statement shows a payoff of $700,000 on the loan.

What did he do with the proceeds of the refinanced loan? Plow it back into the business
or "cash out" for personal reasons?

[JON]

Insured sufficiently

does not mean there is not a gain or loss. I can not understand this. Was the building used after the fire? The mortgage holder was OK with how the insurance proceeds were used? Were they used on the building? To buy another building? How was the loan paid back? From business money? You said the insurance was not rebuilt, insurance was not sufficient-but loan gets paid off and none of the insurance proceeds were sent to the mortgage holder?

[ED SMITH]

This is now a moot question. I had been misled by the 1999 return which showed $50K mortgage int expense on SCH E. However, I now find out that the client hadn't been paying the mortgage for several years. It is unlikely he paid it in 2000 and possibly not in 99 or 98.

The loan was originally for $500K and when the property was sold in 2004 the unpaid mortgage interest was capitalized. The resulting payoff was over $750K.

The money was used for operating expenses for his business, which wasn't related to the rental property. So it is eleiminated on that count too.

The problem with doing these old returns is that it is difficult to get complete and accurate information, records get lost, memories get hazy and some things are completely forgotten.