Did your rental property burn to the ground and was a total loss? Maybe it was a hurricane, tornado or other disaster. Attached is a word document that explains how to deal with it on your taxes using the TurboTax program.
April 23, 2019 7:12 PM last updated April 23, 2019 7:12 PM Connect with an expert
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12 RepliesThis response is solely for removing this post from the "unanswered" queue.
June 27, 2019 12:28 PM Returning MemberNo. Property was sold.
March 8, 2020 3:00 PM New Memberexpenses incurred in 2019 exceeded rental income.. can i write off remainder in 2020?
February 15, 2021 7:37 AMIt's a 2 year old post. But I'll respond anyway since the answer still applies to the 2021 taxes.
expenses incurred in 2019 exceeded rental income.. can i write off remainder in 2020?
No. Not directly anyway. It is very common for rental expenses to exceed rental income each and every year you are renting the property; especially if there's a mortgage on it. When you add up the deductible expenses of mortgage interest, property taxes, insurance and the depreciation you are required to take, those four items alone will almost always exceed the total rental income received for the tax year. Add to that your other allowed expense deduction (repairs, maintenance, etc) and you're practically guaranteed to show a loss on the SCH E line 26.
Beginning in 2018, excess losses can be claimed and deducted from "other" ordinary income up to a maximum of $25K, if certain conditions are met. Any other loss is just carried over to the next year, where they can be deducted *if* you have the rental income to deduct it from. That probably won't happen. So it's rather common for your carry over losses to increase with each passing year. You will not be able to "realize" those losses until the tax year you sell the property. In the tax year you sell the property all carry over losses are fully deductible.
April 17, 2022 7:37 AMThis is an excellent writeup Carl, thank you for all the details in your attached document
My case is a slight variant :
- House burned down completely, in a federal declared disaster
- I was living in the house for 8 yrs before (primary home) but had converted the home to a rental just 1 year before fire.
- Adjusted basis is less than the total insurance payout, hence involuntary gain
- From Section 121 exclusion rules, since i lived in the house for 2 of last 5 yrs, I should be eligible to qualify for capital gains exclusion
Based on your document, if i enter the details in TurboTax it shows that I have to pay a large tax bill on the gain. ( based on 4684 and 4797)
How do I document this sale in Turbo Tax, to avoid paying the taxes on involuntary gain.
Thanks in advance.
September 24, 2022 3:32 PMHow do I document this sale in Turbo Tax, to avoid paying the taxes on involuntary gain.
I am assuming the fire, as well as the total loss insurance payout occurred in 2021. If so, did you sell the land? If so, did you sell it in the same tax year?
Remember, while it's a total loss to the insurance company, it's not a total loss to you. The insurance does not cover the land. Only the structure. That's why it's a total loss for the insurance company, but not for you. You still own the land.Unless you sold it of course.
September 24, 2022 6:43 PMThe loss occurred end of Dec 2021, the insurance proceeds were paid in Aug 2022. I am not selling the land, since we do plan to rebuild eventually. The land was excluded from the adjusted basis of the depreciation, since land is not depreciable.
On the 2022 tax return I assume I have to account for this involuntary capital gain from the insurance payout on the house structure. Since I only rented the house for 1 yr in the last 5 yrs, I assume I can avail of the capital gains exclusion.
So the question is how do I enter this all into Turbo Tax premier software? If I follow your procedure, I cannot exclude the capital gain. Please do advise.
Also another question, if I do rebuild the house from the proceeds, do I even need to report this insurance payout for 2022 return, since it will be used to rebuild the replacement property. Can the basis of the new house be reset and adjusted accordingly ?
September 24, 2022 9:02 PMI am not selling the land, since we do plan to rebuild eventually.
Your gain is taxable, since there was no deeded transfer of property ownership. I assume you figured your taxable gain by subtracting the cost basis of the structure only, from the insurance payout.
, if I do rebuild the house from the proceeds, do I even need to report this insurance payout for 2022 return, since it will be used to rebuild the replacement property.
Can the basis of the new house be reset and adjusted accordingly ?
It has to be adjusted. Basically, the cost basis of the land does not change. If the land cost basis was $30K before the fire, then it's still $30K after the fire. Remember, cost basis is the "LESSER" of what you paid for it when originally purchased, or it's FMV when placed "in service". I seriously doubt your land will be worth less than you paid for it, when you rebuild and rent it out again.
So when you enter your "new" rental property, it's cost basis will be what you paid for the new structure, plus the original cost basis of the land. The absolute earliest you'll be dealing with this, will be on your 2022 tax return you'll complete next year; and only if you actually rebuild and place the property "in service" in 2022.
As a side note, on the 2021 return ensure that your 4562 depreciation reflects the "entire" property no longer in service (converted to personal use), as of the date of the fire. If the 2022 program works correctly on importing, then that property should "not" be imported into the 2022 program. Once the return is completed "AND" accepted by the IRS, print out the entire return, worksheets, calculation forms and all. Expect 100 pages more or less. I suggest this for a reason.
If the property is imported into the 2022 return when it should not be, most will tell you to "just delete it". But I say "not so fast". If the property was incorrectly imported, it's usually for a valid reason - but not always. You'll want to post back to me for help so I can provide guidance on "things to check" before you "just delete it". More than likely, it was imported in error. But I myself would like to be "absolutely sure" on that, before I "just delete it".
With the IRS hiring another 87,000 IRS agents in addition to the 72,000 they already have, they're not doing that to go after the "rich people". So I'm confident you'd want to be certain of things before you "just delete it".
