Rental Property Fire Deductible

You can deduct that as a repair expense in the year you paid it.

You can deduct that as a repair expense in the year you paid it.

No. You can't deduct it as a repair or any other type of expense. That's just flat out wrong. Nothing was repaired. You had a total rebuild. The total of the insurance payout plus any additional money paid out of pocket is your cost basis of the rebuild. Absolutely nothing is  "repair" expense, any way you look at it.

The total amount you paid out-of-pocket, weather it's more or less than your deductible, is included in the cost basis of the rebuild.

TO deal with the original asset that burned down, work through it in the Assets/Depreciation section. Take note of the values in the COST box and COST OF LAND box. You will need this information when entering the rebuild as a new asset.  Continue working it through and indicate that it was "Sold, destroyed, given away, etc...." and the date of disposition will be the date of the fire. Then on the "Special Handling Required?" screen, read the information presented to understand why I am telling you to click YES. Then click YES.

Then, take note of the total depreciation taken on that property. (Prior year's depreciation and current year depr added together)   Subtract that amount from the cost basis to get the amount not yet depreciated. Write this figure down, as this is your "loss" on the burned down structure.

Now for a bit more math, as you'll need to figure your cost basis on your "new" asset entry.

You'll enter the rebuid as a completely new asset in the Assets/Depreciation section. In the COST box, enter the total of the cost of your rebuild, plus the original cost basis of the land, plus the undepreciated loss on the structure that burned down.

In the COST box, enter the total of your original cost allocated to the land, plus the undepreciated loss on the structure that burned down.

Basically what you're doing here, is transferring the undepreciated loss on the old structure, to the land. This increases the cost of the land. Then when you sell the property that will reduce your taxable gain on the sale of the land.

In a nutshell, you don't actually realize your loss from the fire, until the tax year you sell the property. Transfering the loss on the structure to the value of land allows you to "account" for the loss now, so you can "realize" the loss later when the property is sold.