Client bought a house to rent for 50K. It burned to the ground. Insurance paid him 130K to rebuild, which he did. Am I correct that his cost basis which I depreciate is still the original 50K that came out of his pocket?
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Yes, he bought a foreclosed property for cash, a helluva bargain. He did separately get rent replacement which I treated as rent income. So to calculate his new basis - I took the 4797 amount he's paying taxes on and used it as remodel cost on the depreciation worksheet, is that right?
This now makes sense as versus late Saturday night - if he were to sell the house down the road he will have increased basis and a smaller tax bite then.
I assume that's what the casualty worksheet 4684 did. I put in the cost basis (after accumulated depreciation), insurance reimbursement, fair market value before and after the fire event, and Form 4797 shows a gain of $78,500 that he is paying taxes on. I thought this would be his new add-on to cost basis. I confess I have not studied this in decades, and have not had other clients in the past like this.
HA! I forgot to answer. It took all the insurance money to rebuild. The contractor and the insurance company came up with the amount needed -- they use some software to come up with identical cost. That's why I was thinking that he has no gain now (until he sells the house and makes a nice profit).