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Hurricane Insurance Proceeds for Rental Property

Level 3

I have a non-resident client (1040NR - Schedule E) with a vacation home that was damaged during Hurricane Ian in Florida (Declared federal disaster). Insurance paid 500,000 (Flooding, Fema etc). He paid about 200,000 for repairs/new furniture etc. Leaving him with a gain of 300,000 which he will not use for any further repairs. 

Original purchase price was about 1,500,000 - current basis because of depreciation is about 1,200,000.

Is the gain taxable as capital gains? Or does it reduce the depreciation basis by 300,000? Or is this not taxable at all?


IRS states that "When amount you receive from the insurance or other reimbursements is more than the costs or adjusted basis of the property you will typically, subject to a few exceptions for items like inventory, have a capital gain" 

According to this - the 300,000 would be tax free. 

Please advise! Thanks 

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