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How are repairs and insurance settlements handled when

Customer Question

How are repairs and insurance settlements handled when filing taxes for a rental property that was damaged in a tornado? The rental property is a mobile home park. and the insurance settlement totaled all the mobile homes. We were able to repair several mobile homes and keep our Park operating.
Submitted: 1 year ago.
Category: Tax
Expert:  Tax.appeal.168 replied 1 year ago.

Your situation is referred to a casualty loss. SEE BELOW:

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Generally, you may deduct casualty and theft losses relating to your home, household items and vehicles on your federal income tax return. You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement, and you reduce the loss by the amount of any reimbursement or expected reimbursement.

A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected or unusual event such as a flood, hurricane, tornado, fire, earthquake or volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration.

A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent.

If your property is personal-use property or is not completely destroyed, the amount of your casualty loss is the lesser of:

  • The adjusted basis of your property, or
  • The decrease in fair market value of your property as a result of the casualty

The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.

If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis.

You must reduce the loss, whether it is a casualty or theft loss, by any salvage value and by any insurance or other reimbursement you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation.

Report casualty and theft losses on Form 4684 (PDF), Casualties and Thefts. Use Section A for personal-use property and Section B for business or income-producing property. If personal-use property was damaged, destroyed or stolen, you may wish to refer toPublication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). For losses involving business-use property, refer to Publication 584-B (PDF), Business Casualty, Disaster, and Theft Loss Workbook.

REFERENCE SOURCE:

http://www.irs.gov/taxtopics/tc515.html

Link to Form 4684/instructions:

http://www.irs.gov/pub/irs-pdf/f4684.pdf

http://www.irs.gov/pub/irs-pdf/i4684.pdf

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Link to Publication 584-B:

http://www.irs.gov/pub/irs-pdf/p584b.pdf

Let me know if I can be of further assistance to you regarding this matter.

Customer: replied 1 year ago.
If you do not use the repair cost on your tax return; is the insurance settlement check taxable? I've been told that if you do use the cost of repairs, then the tax settlement check is taxable. We have already received an insurance settlement check.
Expert:  Tax.appeal.168 replied 1 year ago.

If you do not report the loss on the tax return, the IRS would likely consider the settlement as taxable income. Keep in the mind that the insurance company will deduct this amount on their tax return. SEE BELOW:

Fact and Amount of Loss Must Be Proven

In order to claim a casualty loss deduction, you must be prepared to prove not only that you lost property in a casualty, but the amount of your loss. This requires knowing your basis in the property, its pre- and post-casualty value and the amount of reimbursement you received.

Expert:  Tax.appeal.168 replied 1 year ago.

REFERENCE SOURCE:

http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/casualty-loss-rules-differ-for-personal-business.aspx

Expert:  Tax.appeal.168 replied 1 year ago.

Received Benefits

Casualty insurance payments are intended to restore your property to the state it was in before you experienced the loss. Since you are just restoring property that you already own, which you paid for with taxable dollars, these payments are not taxable, unless your payments exceed the loss you have experienced.

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REFERENCE SOURCE:

http://finance.zacks.com/casualty-insurance-claim-check-taxable-10721.html

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