Insurance proceeds from roof damage
Posted 03 October 2011 - 02:19 PM
I have a question for a client who owns single family residential rental property. Last year due to rain/hail damage, insurance company paid him $ 4,900.00 and taxpayer in turn spent $ 4,500.00 for roof repair. My understanding is to show $ 4,900.00 as other income on 1040 line 21 and capitalize/add to value of building for $ 4,500.00 for depreciation purpose. For all previous years taxpayer expensed insurance premium against rental income. Filing Sch E. Can somebody correct me if i am wrong.
thanks to all who responds
Posted 03 October 2011 - 02:41 PM
Posted 03 October 2011 - 02:49 PM
I would add the $4,900 to schedule E on its own line instead of line 21 for simplicity.
Have you thought about the $4,900 being return of capital and reduce the basis of the rental property? I wonder what others think.
Keep in mind that insurances give you money to repair (or make it the way it was). The money is not intended to improve your house but to repair it from the damage
Posted 05 October 2011 - 09:04 AM
Posted 05 October 2011 - 12:00 PM
I just got down on phone with IRS, the correct treatment is to report this transaction on form 4684. This is FYI
Posted 05 October 2011 - 12:28 PM
Posted 05 October 2011 - 08:22 PM
Posted 05 October 2011 - 10:50 PM
It's a rare policy that will pay you MORE than your actual loss. Cost of repair is commonly used as a measure of the loss, but who says you have to completely repair it?
Posted 06 October 2011 - 11:56 AM
Here in this context, when I say replacement cost, it would be cost to repair.
Posted 06 October 2011 - 06:40 PM
You said, "replacement cost $4500." That assumes more than was stated in the original post. Apparently the insurance company determined that the cost to repair was $4900. Perhaps the actual expenditure was less because they used less skillful labor or cheaper materials.
Suppose they didn't spend ANY of the insurance proceeds. Suppose the damage was cosmetic and the roof still didn't leak, so they just decided to live with a less attractive house. Would you include the $4900 in taxable income? Of course not, because it still represents the loss in value which is what insurance covers.
Posted 06 October 2011 - 10:24 PM
Posted 07 October 2011 - 04:58 PM
Here is how the IRS says to figure gain, on page 10 of Pub 547 at http://www.irs.gov/p...rs-pdf/p547.pdf. "The amount you receive [insurance], minus your adjusted basis." Where does it say anything about repairs?
In other words, insurance is treated as a basis adjustment, and ONLY counts as income after basis is reduced to zero. Then, money spent (if any) on repairs or replacement, whether from insurance or any other source, adds back new basis.
Posted 07 October 2011 - 05:19 PM
Posted 07 October 2011 - 05:40 PM
Personally, I think it is more realistic to follow the tax code. I'm flattered your IRS agent agrees with me. And besides, where in the original post does it say that $4500 got the property back to its "original shape"? Nowhere.
Posted 07 October 2011 - 06:08 PM
Posted 07 October 2011 - 08:00 PM
I understand why this situation takes us off guard. A lot of questions on the EA exams mention that replacing the roof is a capital improvement and must be depreciated. Think for a moment that the insurance paid $4,900 because you house was flooded and you spent that amount of money cleaning and mold treatment. In the flood event, no one will think about capitalizing it.
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