Author Topic: Do I claim an insurance settlement on my rental property?  (Read 6319 times)

cjw7

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Do I claim an insurance settlement on my rental property?
« on: April 11, 2014, 04:37:18 AM »
Tax question:
I had an insurance pay out for total loss at 119,538 when a large tree fell on the house. Property was not repaired other than to remove the fallen tree and cover up the roof. It was then sold for 3000. The original basis of property is 68,464.
In order to calculate the gain or loss, am I supposed to deduct the insurance payout from the original basis? Do I add or deduct the 3000 sales price?
The reason I am confused is b/c of the tax software instructions. It states to subtract insurance reimbursements from the original basis. that would give me a negative balance, so that means a loss? The insurance reimbursement paid off the mortgage on rental property and mortgage on house I am living in, so it seems as if that would be a gain. The wording has me confused. Below are the tax software instructions:

Add to this original basis:

The cost of any improvements having a useful life of more than one year (e.g. paving a driveway, installing a new roof, installing HVAC, etc.)

Impact fees

Legal fees related to clearing or defending title

Cost of extending power, sewer, or other utilities to the property

Assessments for sidewalks and roads

Now subtract:

Section 179 or Section 280F Deductions

Deduction for clean fuel vehicles and refueling property

Deductions allowed or allowable for depreciation, amortization, or depletion

Casualty and theft losses and insurance reimbursements

Easements

Certain energy tax credits

Fishingmn

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Re: Do I claim an insurance settlement on my rental property?
« Reply #1 on: April 11, 2014, 06:37:44 AM »
I would probably recommend consulting a CPA for guidance.

cjw7

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Re: Do I claim an insurance settlement on my rental property?
« Reply #2 on: April 11, 2014, 07:12:03 AM »
not enough time for that...just looking for educated opinions

jba302

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Re: Do I claim an insurance settlement on my rental property?
« Reply #3 on: April 11, 2014, 07:35:34 AM »
I think your taxable gain here is 54,074. Generally insurance settlements are completely not taxed because there is no gain to be realized(rule of indemnification). However, rental properties don't have the same exclusions for capital gain that personal properties do so unless there's a specific rule here to rentals that I'm not thinking of, I would just apply final realized gains less cost basis. If you did any depreciation recapture that has to be taken into consideration as well.

cjw7

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Re: Do I claim an insurance settlement on my rental property?
« Reply #4 on: April 11, 2014, 07:42:18 AM »
unfortunately I  thought this as well, but I wanted to see if anyone backed up my thoughts, thanks

cjw7

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Re: Do I claim an insurance settlement on my rental property?
« Reply #5 on: April 11, 2014, 07:44:08 AM »
the reason I was asking in the first place was b/c of the tax software guidelines. They make it sound as if I am to subtract the insurance payout from the basis which would leave a negative amount, therefore a loss.

cjw7

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Re: Do I claim an insurance settlement on my rental property?
« Reply #6 on: April 11, 2014, 07:48:02 AM »
After paying off the mortgage on the rental property I did pay off my personal property with the rest of the funds, does that change anything?

jba302

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Re: Do I claim an insurance settlement on my rental property?
« Reply #7 on: April 11, 2014, 09:05:22 AM »
Boy, not that I know of. I know you can 1031 into another rental but it doesn't apply to primary residence. Someone smarter will have to input there.

Rural

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Re: Do I claim an insurance settlement on my rental property?
« Reply #8 on: April 11, 2014, 09:06:25 AM »
You have quite a few complicated, detailed questions about a big-ticket item here. I don't know anything at all about your particular issue, but I do think that you should consider filing an extension on your taxes, paying what you think is the most likely amount you'll owe, and then using the extra time to get professional advice.

babysteps

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Re: Do I claim an insurance settlement on my rental property?
« Reply #9 on: April 11, 2014, 02:08:19 PM »
You have quite a few complicated, detailed questions about a big-ticket item here. I don't know anything at all about your particular issue, but I do think that you should consider filing an extension on your taxes, paying what you think is the most likely amount you'll owe, and then using the extra time to get professional advice.

This!!

the reason I was asking in the first place was b/c of the tax software guidelines. They make it sound as if I am to subtract the insurance payout from the basis which would leave a negative amount, therefore a loss.

Your math sounds fuzzy?  A lower basis would *increase* any gain.  In your case, ignoring any adjustment for depreciation, your software is telling you that you will have a negative basis.  Change the sign and add the $3,000 sales price and you have a gain.  For me it's easier to think about (and you get the same final answer) if you add the insurance payout to the sales price, then subtract your initial purchase price.

cjw7

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Re: Do I claim an insurance settlement on my rental property?
« Reply #10 on: April 11, 2014, 08:02:23 PM »
thanks for all comments :)

Weedy Acres

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Re: Do I claim an insurance settlement on my rental property?
« Reply #11 on: April 16, 2014, 05:36:18 AM »
When I don't understand something in my tax software, I find the relevant form instructions on irs.gov.  They actually do a pretty good job of explaining the rules, giving examples, etc.  Just google "form 123 instructions" and it'll get you there.