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Insurance paid for burned rental

Greta
Level 7

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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Skylane
Level 8
Level 8

Follow the casualty loss form and workflow you’ll find a taxable gain and new depreciable basis in your clients future.... 

View solution in original post

14 Replies 14
IRonMaN
Level 15

How much did it cost to rebuild the new property?

Armpit sniffer. Yup, checked out the help wanted ads and found the job. With my nose, how can I go wrong?
Skylane
Level 8
Level 8

Follow the casualty loss form and workflow you’ll find a taxable gain and new depreciable basis in your clients future.... 

View solution in original post

Greta
Level 7

Duh, I'm an idiot. I used to do casualty losses during the big 1985 flood in Virginia, though folks didn't have flood insurance. Very helpful worksheet, thanks!

Skylane
Level 8
Level 8

@Greta  Some of the claim settlement should have been loss or rents. The adjuster would have provided a breakdown .

.  50K property to 130K fire settlement sounds like he got a very good purchase price. 

Greta
Level 7

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.

Skylane
Level 8
Level 8
Are you picking up the difference bet the original basis and new one as income?
Greta
Level 7

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.

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sjrcpa
Level 15

Casualty gain is not taxable to extent proceeds were used to rebuild.


ex-AllStar
Greta
Level 7

Is there a box on the casualty 4686 worksheet where I indicate that all the proceeds were indeed used to rebuild?

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Greta
Level 7

The last advice message is that casualty gain is not taxable if it's used to rebuild the house. Your thoughts?

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IRonMaN
Level 15

Back to my original question - what did it cost to rebuild?

Armpit sniffer. Yup, checked out the help wanted ads and found the job. With my nose, how can I go wrong?
Greta
Level 7

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).

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IRonMaN
Level 15

You are right - he has no gain.

Armpit sniffer. Yup, checked out the help wanted ads and found the job. With my nose, how can I go wrong?
BobKamman
Level 13

But of course, the accepted answer is that there is a taxable gain. 

Those are the rules.  Whatever sounds right in first 30 minutes, is a winner.