@Anonymous_ wrote:

@Opus 17 wrote:
And also (4), if you received an insurance payment, that reduces your cost basis. (The other expert says it increases the selling price, that will technically have the same effect on the gains calculation.)

How is the calculation going to be handled and reported in the following scenario?:

The land was sold for $150,000 (which @Caroleg22 mentioned in another thread) with a basis of $150,000 and the insurance payout on the destroyed house itself was, for example, $350,000? In other words, this was a limits claim and payout.

Report a basis of -$200,000?

Now that I think of your specific example, if the cost basis was $150,000 and the insurance payment was $350,000, the taxpayer would be required to report and pay tax on a $200,000 capital gain in the year of the insurance payment. (See publication 547, Gain from Reimbursement). Then, when selling the property in 2024, their basis is zero and they have a $150,000 capital gain. (Although they can increase their basis in the land by the cost of demolition and remediation.)

And I don't know how the exclusion would apply. It may be that the exclusion can be used for both transactions, as long as the land is sold within 2 years of the destruction of the house. But I would want an expert to review that.

So we really need to know what @Caroleg22 did in 2022.

Anonymous_

Employee

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Opus 17

Employee

@Caroleg22

After further thought,

Yes, in principle you can claim the exclusion. However, the calculation is complicated by any insurance payment you received in 2022, because that reduces your basis and might have been taxable in 2022.

You say you bought the property 15 years ago for $150,000. There was a fire in 2022. You did not rebuild the house. You sold the land in 2024 for $150,000.

Can you answer these questions to start:

1. Did you get an insurance payout in 2022? How much?

2. Did you declare a casualty loss on your tax return? If so, how much?

3. If you received an insurance payout in 2022, did you declare it (or part of it) as taxable income on your 2022 tax return?

4. Did you pay for demolition or remediation of the land after the fire, and was that covered by insurance or did you pay out of pocket?

[Edited to add]

5. Did you pay for any permanent improvements between the purchase and the fire (like a new roof, solar panels, new furnace or air conditioning, and so on)?

Caroleg22Author

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Anonymous_

Employee

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alyssaking92

Did you get an answer from a local professional on this like you stated? I'm curious as I went through a very similar situation and am trying to figure out what if anything I need to be including in my income.

Caroleg22Author

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Opus 17

Employee

@Caroleg22 wrote:

I have not spoken with a professional yet. However, I did find a worksheet in the TurboTax Premier edition on the sale of your home that factors in a fire loss and insurance claim when selling your home. Based on that information, my home basis was zero, so the sale of $150,000 would be non-taxable. I will probably still consult an accountant to make sure I am understanding everything correctly.

I would like to see the worksheet you used because I think you misunderstood it. If you have zero basis in a piece of property, and you sell it for $150,000, you have a capital gain of $150,000.

You might be able to exclude the gain from your income (make it not taxable) if it was the sale of your personal home and you meet certain time limits, but the gain is still there.