My client experienced structural failure to his farm barn in 2023 as the result of high winds in a storm. Insurance paid out FMV of the barn, which was far greater than adjusted basis. Rather than try to repair or rebuild the barn, the owner paid to have it torn down and the debris removed from the property; then he used the claim proceeds from the wind-damaged barn, to make repairs to a different barn that is used for an entirely different purpose. The barn that was repaired using the insurance payout was experiencing normal decline due to age, and did not experience wind damage. I have been looking into the best options for this client's tax return, and have come across a distinction between Sec. 162 and 165 for this purpose. It appears that Sec. 162 may be preferable for deduction of both the tear-down expenses, and the deterioration repairs expenses, but I have not been able to determine whether I need to file Form 4684, and/or adjust the basis for the farm buildings and recognize gain. In this case, one of the buildings was completely removed, but the other was returned to a more useful condition using the insurance money. There is a trust that also has an interest in this farm with part ownership in both barns. I am assuming that both the individual return and the trust return would use the same methodology and forms for this activity. If anyone can provide a clear picture regarding exactly what needs to be done in this regard for the tax return, that would be very helpful.
