rental trashed by tenant

Rental was totally trashed by tenant so it was unrentable all of 2018. He was reimbursed part by insurance but spent an additional $94000 to fix it up. He has agreed that some of this could be characterized as improvements. My question is, can we take some of the repairs in 2018 even though there was virtually no rent. One of the contractors stayed there for two months so that is rent.

Wow! The *tenant* got money from the insurance!! That's a new one on me! How 'bout you?

Ha Ha! It does read like that. The landlord got the money.

My question is, can we take some of the repairs in 2018 even though there was virtually no rent.

Do you need rent revenue to deduct expenses? If you do, wouldn't that logic extend to the month a rental is being turned-over and not rented if we further segment into monthly basis and not annual?

I would think the important thing would be what was going on with the property and the taxpayer's efforts and actions regarding the property. What happened with the property before it was trashed? It was rented, correct? For how long? What happened to the property after it was repaired? For how long? During the repair, did the taxpayer act like a rational, for-profit rental owner and try to get the property back on the market as soon as possible?

Also, wouldn't most of the "repairs" be capitalized?

Also, wouldn't most of the "repairs" be capitalized?

If you're only bringing it back to usable state, why wouldn't it be a repair?

A given was He has agreed that some of this could be characterized as improvements. My question is, can we take some of the repairs in 2018 even though there was virtually no rent.

If you're only bringing it back to usable state, why wouldn't it be a repair?

I would think that we would apply the Betterment, Adaptation, Restoration (BAR) tests to make that determination.

Don't forget about the partial disposition election for the part of the work that is an improvement.

I had a similar situation, except hurricane flooding destroyed interior of 1st floor of a rental property. We let the insurance proceeds offset the repair costs, and any additional costs were capitalized as improvements since the client said the property was slightly upgraded during the repair process (moved a wall, and whole electrical system had to be replaced).

You could go thru the gyrations of partial disposition election, with proceeds being more than the basis, and having the gain reduce the basis of the new asset(thru 1031), and start the depreciation life over again. But, for real, who is going to be able to say exactly how much of the original asset was disposed?

For example:

100k duplex (100k is net of land)
50k in depr already taken
70k in insurance proceeds
75k in repair/improvement costs

lower 1/2 of duplex bldg completely destroyed(needed to be gutted & redone). Entire electrical system & Plumbing system for both floors had to be redone.

Partial disposition of 1/2 of 100k cost =50k, less 25k depreciation, +70k in proceeds=45k gain

Replacement asset =75k repair/Improvement less 45k gain from above=net 30 k asset

Original depreciation=100k/27.5=3636.00/yr

Partial Original remaining depr=3636/2=1818.00/yr
New asset 30k/27.5=1091.00/yr
Net new depreciation if you go thru all of that =1818.00+1091.00=2909.00/yr.

How do you say which one is correct and/or fair? The entire plumbing and electrical system was not disposed of by the 50% partial disposal above.

If it was your primary home, there is a safe harbor to treat the repair cost to be the basis, so there is no net gain from a casualty event such as this one.

bump

But, for real, who is going to be able to say exactly how much of the original asset was disposed?

A CPE course I took about two months ago suggested this approach to determining basis to dispose of relating to a partial asset disposition of a rental:

(Cost of improvements to building / FMV of building after improvements) x Unadjusted tax basis of building = Unadjusted tax basis of building to dispose of in partial asset disposition.