Insurance paid for burned rental

[Greta]

Client bought a house to rent for 50K. It burned to the ground. Insurance paid him 130K to rebuild, which he did. Am I correct that his cost basis which I depreciate is still the original 50K that came out of his pocket?

[IRonMaN]

How much did it cost to rebuild the new property?

[Skylane · Accepted solution]

Follow the casualty loss form and workflow you’ll find a taxable gain and new depreciable basis in your clients future.... 

[Greta]

Duh, I'm an idiot. I used to do casualty losses during the big 1985 flood in Virginia, though folks didn't have flood insurance. Very helpful worksheet, thanks!

[Skylane]

@Greta  Some of the claim settlement should have been loss or rents. The adjuster would have provided a breakdown .

.  50K property to 130K fire settlement sounds like he got a very good purchase price. 

[Greta]

Yes, he bought a foreclosed property for cash, a helluva bargain. He did separately get rent replacement which I treated as rent income. So to calculate his new basis - I took the 4797 amount he's paying taxes on and used it as remodel cost on the depreciation worksheet, is that right?

This now makes sense as versus late Saturday night - if he were to sell the house down the road he will have increased basis and a smaller tax bite then.

[Skylane]

Are you picking up the difference bet the original basis and new one as income?

[Greta]

I assume that's what the casualty worksheet 4684 did. I put in the cost basis (after accumulated depreciation), insurance reimbursement, fair market value before and after the fire event, and Form 4797 shows a gain of $78,500 that he is paying taxes on. I thought this would be his new add-on to cost basis. I confess I have not studied this in decades, and have not had other clients in the past like this.

[sjrcpa]

Casualty gain is not taxable to extent proceeds were used to rebuild.

[Greta]

Is there a box on the casualty 4686 worksheet where I indicate that all the proceeds were indeed used to rebuild?

[Greta]

The last advice message is that casualty gain is not taxable if it's used to rebuild the house. Your thoughts?

[IRonMaN]

Back to my original question - what did it cost to rebuild?

[Greta]

HA! I forgot to answer. It took all the insurance money to rebuild. The contractor and the insurance company came up with the amount needed -- they use some software to come up with identical cost. That's why I was thinking that he has no gain now (until he sells the house and makes a nice profit).

[IRonMaN]

You are right - he has no gain.

[BobKamman]

But of course, the accepted answer is that there is a taxable gain. 

Those are the rules.  Whatever sounds right in first 30 minutes, is a winner.