insurance paid for clean up after fire damage to rental property.

Forum|Forum|3 years ago
February 8, 2023
1 reply
0 views

is clean up paid directly by insurance company for a rental property fire used to calculate gain or loss.

JosephS1

Yes it is. Insurance proceeds apparently in this case are for actual damages. If the damages to restore the property to usefulness are greater than the insurance proceeds you will be eligible to claim a deduction for the difference. If the proceeds are greater than the damages, it would normally not be a taxable item unless you did not expend the funds that were received to restore what you are being reimbursed for.

@dgoscenski

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

Carl11_2

Employee

How you handle it, depends on to many things to list here really. But here's one (of a few) basic ways to do it.

All income from all sources received for any reason for rental property is included in the rental income. So in the case of an insurance payout, it gets included in the rental income.

Most likely, the restoration of the property after fire damage would be considered a property improvement, since insurance doesn't pay for "repairs" per-se. (They do if certain criteria are met. But they have to exceed your deductible by quite a bit to be worth filing a claim.) Therefore, that cost would be entered as such, in the assets/depreciation section. It would be classified under MACRS as Residential Rental Real Estate and depreciated over 27.5 years with depreciation starting once the restoration was complete and/or the property was "available for rent" again - whichever date is later.

If the restoration increased the value of the property above it's cost basis/FMV before the fire, this would definitely add to the cost basis. However, you can reduce that cost basis by the difference between the cost basis of the loss, and the insurance payout, if the cost basis of the loss was less than the insurance payout.

In some instances, restoration will not change the cost basis of the property at all. When that occurs, there's really no need to report the insurance payout "or" the cost of the restoration unless the cost of that restoration is significantly more than or less than the insurance payout. Any part of the insurance payout not used to restore, maintain or improve the property would be taxable income to you.

It can get complicated depending on one's situation. I've not covered all possibilities here by far. I'd need the details of your specific situation to be of any help/use really.