ljwalters Posted March 20, 2015 Report Share Posted March 20, 2015 Client sent me an email. (his return has been done for weeks) His last rental house burned to the ground Sunday night. His question, what are the tax ramifications? I told him to let the insurance rebuild. He said "Right now I prefer not to re-build...no longer encouraged to be a landlord." He wants to take the insurance for the structure and sell the property. He was out of town and will be back tomorrow to check everything out and discus tax issues. I have never dealt with anything like this. Where to start the research and how to proceed. This is all for 2015 TY but the decisions need to be made now. Quote Link to comment Share on other sites More sharing options...
rfassett Posted March 20, 2015 Report Share Posted March 20, 2015 A fire can be very debilitating and disheartening experience. Anyone who has experienced it first hand will attest to that. Your guy is asking the right questions. And the rules are pretty simple. Use the insurance proceeds to rebuild and pay little to no tax. Use the insurance money to go play and the piper will need to be paid. Your guy needs to explore all of the different approaches and decide what makes most sense to him going forward. He needs to be honest with the insurance appraiser and gather all of the info necessary to make an informed decision. My first hand experience with fire? My parents house, 8 years after I left home, was the victim of a fire that spread from the neighbor's house. The neighbor's house caught fire because the kids in that house were playing with matches under the bed. At the end of the day, both houses were completely and utterly destroyed. They say no one died or was injured in the fire. My Mom, just a couple years later at the very young age of 58 years old, died never having gotten over losing every thing she owned in that fire. I attribute her death, from a massive coronary event, directly to the fire. I relay that story simply to reemphasize my first two sentences in this post. Your guy needs to understand that his decisions do not affect him alone. 4 2 Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted March 20, 2015 Report Share Posted March 20, 2015 Linda, I believe that the transaction would be a sale or other disposition of an asset. There may be two transactions if he does not want to build. There will be a cost, covered by insurance hopefully, for the clean up and restoration of the land. That cost will be a non-taxable transaction, as it just puts the land back to the condition that it should be in to sell it. The proceeds from the insurance for the home that was destroyed would be the selling price of the home asset. Gain or loss would be recognized based on the remaining basis in the property. It will flow through the 4797 to the 1040. The short year schedule e will also go to the 1040 as normal, and if their are any suspended passive losses, they will be released and flow to the 1040 as well. The land will convert from rental property to investment property until sold and will will produce a capital gain or loss depending on the sale price and the basis. Hope this helps. Tom Newark, CA 5 Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 21, 2015 Report Share Posted March 21, 2015 Tom is spot on. So make sure that, regardless of which way he decides to go, he gets, and keeps a detailed breakdown from his insurance co of what he gets for what. You don't need just a total, he should get a breakdown of how much is for what, landscaping [clean up replacing plants and/or paving, etc, damage to trees, etc] building, possibly loss of rental income, depending on his coverage. 4 Quote Link to comment Share on other sites More sharing options...
SaraEA Posted March 21, 2015 Report Share Posted March 21, 2015 Gain or loss on the structure will be calculated on Form 4684, which takes into the calculation the insurance proceeds. There may be gain or loss depending on basis, depreciation recapture, and what the insurance company eventually pays. You may not settle this until 2016. Eventual sale of the land will be on 4797. Had the exact same thing happen to a partnership that had two neighboring buildings burn, one salvageable the other totaled. The two original partners had zero basis. Six others had inherited their interests from six deceased partners so every one had a different basis. What a nightmare. If your client really doesn't want to rebuild, he should be advised to hang onto the insurance payment until the taxes are calculated. Assure him there will be some left for him. Quote Link to comment Share on other sites More sharing options...
ljwalters Posted March 21, 2015 Author Report Share Posted March 21, 2015 The house was paid off and depreciation all most done. This is going to be a big hit for him. Imagine finding this out while on vacation. If he decides to rebuild do we have to change the depreciation in any way. I can't imagine him not deciding to rebuild even if just to sell. It is in Vacaville which is booming right now. Thanks for all your help. Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted March 21, 2015 Report Share Posted March 21, 2015 LJ: He also has up to two years to reinvest the proceeds from a casualty loss. ITs Code Section 1033 or 1034. He may not want to be a landlord at "that" location anymore, but maybe in a "new" location. Today is just a day to ponder what was lost. Tomorrow may bring to your client other info to make another choice. Rich 3 Quote Link to comment Share on other sites More sharing options...
ljwalters Posted March 21, 2015 Author Report Share Posted March 21, 2015 Thanks Rich I did not know that. Quote Link to comment Share on other sites More sharing options...
Patti in Upstate NY Posted April 14, 2018 Report Share Posted April 14, 2018 This 3 year old post was invaluable. Tom? What do you drink? I'll send you a case of whatever it is........ As promised. Here I am. Asking for more. Sorry. Especially when I'm new. My clients were quite surprised to hear what the law was and that their gain is $293K. They're thinking about purchasing another two family in another state and they understand they only have two years to make that decision. But they want it to be an informed decision. Do I make an official election? Or did I read correctly that by not reporting the gain this year that we are in effect making the election to defer the gain? I am soooooooooo tired. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted April 15, 2018 Report Share Posted April 15, 2018 1 hour ago, Patti in Upstate NY said: Do I make an official election? Or did I read correctly that by not reporting the gain this year that we are in effect making the election to defer the gain? You have to include a statement with the return in the year the gain is realized, meaning the year the insurance reimbursement is received. The required information is explained on page 14 of pub 547 . 4 Quote Link to comment Share on other sites More sharing options...
Catherine Posted April 15, 2018 Report Share Posted April 15, 2018 And Judy (aka @jklcpa the Magnificent) once again has a cite and quote and reference. Judy, I have NO idea how you manage to do this in the midst of the busy tax season - but we all love you for it! 7 1 Quote Link to comment Share on other sites More sharing options...
Edsel Posted April 15, 2018 Report Share Posted April 15, 2018 I haven't yet heard a specific reference to bailing out of a casualty gain with replacement property. If there is insurance proceeds covering the FMV, the result may be a large gain based on historical purchase value. If the owner is confronted with today's cost to replace, there may not be any gain remaining if he chooses to replace. Quote Link to comment Share on other sites More sharing options...
Bart Posted April 15, 2018 Report Share Posted April 15, 2018 1 hour ago, Catherine said: And Judy (aka @jklcpa the Magnificent) once again has a cite and quote and reference. Judy, I have NO idea how you manage to do this in the midst of the busy tax season - but we all love you for it! I tried to like this twice but it would not do it 4 1 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted April 15, 2018 Report Share Posted April 15, 2018 1 hour ago, Catherine said: Judy, I have NO idea how you manage to do this Shhhhh! "Google" may be my new middle name. With any search tool, using the best key word and having some idea of what to look for are the most important aspects. With that last statement, you see why my husband has been calling me "Captain Obvious" lately. What's funny is how easy it seems now when thinking back to how truly terrible I was at using the giant library of printed loose-leaf books of code, regs, and cases from CCH. That was the stuff of nightmares. 5 Quote Link to comment Share on other sites More sharing options...
Yardley CPA Posted April 15, 2018 Report Share Posted April 15, 2018 It was nice to see KC's name on this post. She was just a great member of this community and I hope she is doing well. 4 Quote Link to comment Share on other sites More sharing options...
Catherine Posted April 15, 2018 Report Share Posted April 15, 2018 13 hours ago, jklcpa said: the giant library of printed loose-leaf books My first job EVER was to replace the pages. My dad would bring them home a few at a time from his office with the replacement page sets, and I'd go through and update. Next night he'd bring back another few books.... Maybe that's why I can find things in books super fast, but cannot for the life of me get the keywords right for an online search! 2 Quote Link to comment Share on other sites More sharing options...
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