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RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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client received insurance proceeds for fire damage on rental

Resolved Question:

client received insurance proceeds for fire damage on rental (Schedule E) property....
book value = $77,759 ....insurance paid $531,400....I'm showing a capital gain of $453,641 with no way to offset using $334,000 spent on improvements because income too high to take any rental losses.
Because I have two years to report casualty - my thought is to convert rental to active Schedule C for 2009 and report is all in 2010 in order to get offset.
Is this ok and logical...?
Submitted: 5 years ago.
Category: Tax
Expert:  RD replied 5 years ago.
How can you convert rental activity to Sch C - rental activity is passive activity and hence cannot be reported on Sch C.

Have you spent $334,000 in improvements from the insurance proceeds received?
Customer: replied 5 years ago.
Client (Father) receives rent from Daughter and her husband.
We have the option of recognizing the flea market revenue on Father's tax return because in fact the rent payments cannot be made in full this year anyway. The Flea Market has a small restaurant inside...Daughter and Son will recognize this revenue on their return, they could pay a nominal rent so that we could have both a Schedule E and a Schedule C. It is true that since the fire client (Father) has been totally drawn back into the business because he is the owner.
Yes $334,000 has been spent.
Thank you very much for your help.
Expert:  RD replied 5 years ago.
<p>To the extent you use the insurance proceeds to restore the property - you can post pone the gain on the property. </p><p> </p><p>To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. </p><p> </p><p>I hope this helps you with your question. If not, please clarify the question that you have and I will address it further.</p><p> </p><p> </p>
Customer: replied 5 years ago.
This was not my question, but thanks anyway
Expert:  RD replied 5 years ago.
I will be glad to help you if you can state your question in detail.
Customer: replied 5 years ago.
This confusion is my fault.    Please verify that on the form 4684 line 26...cost or adjusted basis WILL INCLUDE the amount of insurance proceeds that have been spent on the property.    So line 28 gain will be basis before fire, plus insurance proceeds spent to restore, less total insurance proceeds = gain.   Thanks..Mary
Expert:  RD replied 5 years ago.
<p>Yes, that is correct. and hence, I said that the to the extent you use the insurance proceeds to restore the property - you can post pone the gain on the property and hence will not be taxed. Balance gain will be taxable.</p><p> </p><p>Yes, you will report the gain on Form 4684 and than from there on Form 4797.</p><p> </p><p> </p><p> </p><p><a name="OLE_LINK157" title="OLE_LINK157"></a><a name="OLE_LINK156" title="OLE_LINK156"></a><a name="OLE_LINK108" title="OLE_LINK108"></a><a name="OLE_LINK107" title="OLE_LINK107"></a>Let me know if you have any question. </p><p> </p><p>Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.</p>
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience: CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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