Rental bldg Damaged

Technical topics regarding tax preparation.
#1
Bell  
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I have a rental building that was hit by a vehicle. Insurance from vehicle paid for damages. 20k. Expenses to repair were 15k.

How do I handle this on Partnership tax return? Is this a F4684 Business Casualty?
 

#2
Nilodop  
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The more substantive point is that if the decline in value of the building was at least 20k, then there is no taxable gain, just a basis reduction.
Last edited by Nilodop on 20-Jan-2021 5:48pm, edited 1 time in total.
 

#3
Bell  
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I need not show the insurance reimbursement on the return nor the expenses paid to do the repairs?

Adjusted basis of bldg..........50k
Insurance..........................20k
FMV Before.......................65k
FMV After.........................50k (65 less 15 to actually repair)

Since reimbursement is less than Adjusted basis, there is no taxable gain. Is that correct?

Basis adjustment would be 15k repair less 20k reimbursement increasing the basis by 5k.

Assuming I have this right, do I add another depreciation asset for 5k and depreciate same as building?
 

#4
Nilodop  
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I think you're not following what I said.

I need not show the insurance reimbursement on the return nor the expenses paid to do the repairs?. Not what I said. In fact I did not even address the form or the presentation. Probably need the form. Others who actually do returns can tell you.

FMV Before.......................65k
FMV After.........................50k (65 less 15 to actually repair)

My answer above assumed a decline in value of at least $20k. You are allowed to use the repair cost, thus a decline of only $15k, but that means taxable gain of $5k.

Basis adjustment would be 15k repair less 20k reimbursement increasing the basis by 5k. . No, a reduced basis of $5k.

Assuming I have this right, do I add another depreciation asset for 5k and depreciate same as building?
See above.
 

#5
dave829  
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The amount of repairs is only an indication of the amount of the casualty loss. Reg. 1.165-7(b)(1) actually says that the amount deductible is the decrease in FMV, limited to adjusted basis:

(b) Amount deductible.---(1) General rule.---In the case of any casualty loss whether or not incurred in a trade or business or in any transaction entered into for profit, the amount of loss to be taken into account for purposes of section 165(a) shall be the lesser of either---
(i) The amount which is equal to the fair market value of the property immediately before the casualty reduced by the fair market value of the property immediately after the casualty; or
(ii) The amount of the adjusted basis prescribed in §1.1011-1 for determining the loss from the sale or other disposition of the property involved.
However, if property used in a trade or business or held for the production of income is totally destroyed by casualty, and if the fair market value of such property immediately before the casualty is less than the adjusted basis of such property, the amount of the adjusted basis of such property shall be treated as the amount of the loss for purposes of section 165(a).

So, what was the decrease in FMV of the rental building?
 

#6
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dave829 wrote:So, what was the decrease in FMV of the rental building?


I think this may be getting a little more academic than is necessary. Generally, we would expect the repair to bring the FMV back up to where it was prior to the damage.
The better question to ask is this: Is the building any different in value before the repair than after the repair?
My presumption would be no.

If that's the case, you have $5K of income related to excess funds received.
~Captcook
 

#7
Bell  
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Decrease in FMV is 15k
Insurance reimbursement is 20k
5k excess
Fair Market Value before the repair 65k
Fair Market Value after the repair 65k

Do I have 5k income to add to the net profit?

Or do I have a basis reduction? If basis reduction, do I just do it on the depreciation worksheet?
 

#8
dave829  
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Bell wrote:Decrease in FMV is 15k
Insurance reimbursement is 20k

Then I have to ask, if the decrease in FMV was $15K, and repairs were $15K, then why did insurance reimburse $20K? Insurance companies usually don't pay for more than the actual damage done. Was the extra $5K for loss of rental income?
 

#9
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Bell wrote:Decrease in FMV is 15k
Insurance reimbursement is 20k
5k excess


Okay...following you here, you provided that initially. No problem.

Bell wrote:Fair Market Value before the repair 65k
Fair Market Value after the repair 65k


You can stop at this point. There's no loss to account for.

Bell wrote:Do I have 5k income to add to the net profit?


Yes

Bell wrote:Or do I have a basis reduction? If basis reduction, do I just do it on the depreciation worksheet?


No basis reduction. If FMV decreased by $5K, then the additional $5K your client received was a reimbursement for that decrease in value. That would reduce the basis, as Len properly suggested above.
~Captcook
 

#10
Nilodop  
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The amount of repairs is only an indication of the amount of the casualty loss.. See (ii) below.
1.165-7(a)
(2) Method of valuation.

(i) In determining the amount of loss deductible under this section, the fair market value of the property immediately before and immediately after the casualty shall generally be ascertairk done cheaper. ned by competent appraisal. This appraisal must recognize the effects of any general market decline affecting undamaged as well as damaged property which may occur simultaneously with the casualty, in order that any deduction under this section shall be limited to the actual loss resulting from damage to the property.

(ii) The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that (a) the repairs are necessary to restore the property to its condition immediately before the casualty, (b) the amount spent for such repairs is not excessive, (c) the repairs do not care for more than the damage suffered, and (d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty.


Generally, we would expect the repair to bring the FMV back up to where it was prior to the damage. . Or less. Or more. It is not unusual to get an estimate that the ins. co. approves and pays and then to shop and get the workk done cheaper. (Or sometimes not even get the work done at all).You're still left with determining the decrease in FMV for IRS purposes. That's the deduction starting point. The basis is the upper limit of the deduction. But as was said above, here there is no deduction because the reduced value was reimbursed and then some.

The better question to ask is this: Is the building any different in value before the repair than after the repair?
My presumption would be no.

That would be relevant to complying with (a)(2)(ii) above.
 

#11
Bell  
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Thank you for all of this help. Greatly appreciated. When I fill out the Form 4684 Business Casualty, it computes no loss.........which we know........but it computes no taxable gain, either. Apparently, as long as the insurance reimbursement is less than the adjusted basis..........there is no taxable gain. Is this correct? I thought there was a gain of 5k?
 

#12
Nilodop  
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Again, it depends whether the decline in value was at least $20k. You have told us it is not. Ergo, there is a gain of $5k.
 

#13
CP Hay  
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Nilodop wrote:The amount of repairs is only an indication of the amount of the casualty loss.. See (ii) below.
1.165-7(a)
(2) Method of valuation.

(i) In determining the amount of loss deductible under this section, the fair market value of the property immediately before and immediately after the casualty shall generally be ascertairk done cheaper. ned by competent appraisal. This appraisal must recognize the effects of any general market decline affecting undamaged as well as damaged property which may occur simultaneously with the casualty, in order that any deduction under this section shall be limited to the actual loss resulting from damage to the property.

(ii) The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that (a) the repairs are necessary to restore the property to its condition immediately before the casualty, (b) the amount spent for such repairs is not excessive, (c) the repairs do not care for more than the damage suffered, and (d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty.


Generally, we would expect the repair to bring the FMV back up to where it was prior to the damage. . Or less. Or more. It is not unusual to get an estimate that the ins. co. approves and pays and then to shop and get the workk done cheaper. (Or sometimes not even get the work done at all).You're still left with determining the decrease in FMV for IRS purposes. That's the deduction starting point. The basis is the upper limit of the deduction. But as was said above, here there is no deduction because the reduced value was reimbursed and then some.

The better question to ask is this: Is the building any different in value before the repair than after the repair?
My presumption would be no.

That would be relevant to complying with (a)(2)(ii) above.


I'm wrestling with a similar situation. My concern is the determination of the FMV immediately before the casualty. If the insurance company makes a payment based off of an estimate, that's not helping in figuring out the FMV immediately before the incident. Is it customary for insurance companies to pay out like this or do they somehow come up with the FMV before the casualty?
 

#14
Nilodop  
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Those rules are tax rules. The insurance co. pays what the policy says, typically the repair cost to make it the same as before the damgae. But policies may also say not more than the value before the casualty.
 

#15
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You have two years to spend the $5K on improvements in order to avoid a taxable gain.
 

#16
Nilodop  
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Isn't two years the rule for replacement of property under 1033 (involuntary conversion into money or other property)? When you repair/restore a casualty-damaged property, is that really the rule? The starting point is the casualty loss, determined as described in the regs. (above). There's no specifically stated time limit on those repairs, though I suppose actual repairs spent might be better evidence than, say, an estimate. But the main point is that there's a gain and it's taxable. Improving the property, whether right away or within two years or whenever, does not reduce that gain if the earlier repair got the property back to its condition pre-casualty.
 

#17
CP Hay  
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mlaubercpa wrote:You have two years to spend the $5K on improvements in order to avoid a taxable gain.


So wait, what happens in this case. Business property casualty happens in Year 1, then in Year 2 you receive the insurance reimbursement and make some of the repairs and in Year 3 you complete the repairs. In Year 2 you claim a gain for the difference between the insurance reimbursement and the amount spent. How do you then handle Year 3's costs?
 

#18
Nilodop  
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CP Hay, please read # 16. There is no 2-year rule in your facts. You are dealng with sec 165, not sec 1033. IMO.
 

#19
CP Hay  
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I guess my question is if, even if there is no time limit on the repair, would a payment for repair after Year 2 allow for an amendment of the Year 2 tax return?
 

#20
Nilodop  
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I know what you're asking. I don't think the answer is all that clear. In #16, I said there's no time limit on repairs to be done. But I have no authority for that; just that the regs. don't say. How long might one wait to spend the repair money? Is it required that you report a gain in the year of collection of the claim if you plan to repair the next year? In your example, I'd guess you don't amend the earlier year return; rather, you'd deduct the later ependiture in the year spent. But that makes no sense at all. While it may not say this anywhere, just like you can (must) reduce a casualty loss by the anticipated compensation for the loss, and then adjust it in a later year if the claim is paid in a lower or higher amount than anticipated (see 1.165-1(d), a similar approach should apply if you plan to repair the property but don't do it until a later year, and adjustments can be made in that later year. I don't think you'd report the casualty gain (in your example) in year 2 if you anticipate repairing in year 3, but you'd adjust for what really happens in year 3 if different from anticipated. Problem is, that rule is not stated anywhere that I found. It may exist in a case or ruling.

And don't lose sight of this. The casualty loss is based on decline in value, which by its very nature is somewhat of an estimate, and using the cost of repairs as a substitute, as per the regs., can logically be inferred to mean an estimate of the cost of repairs. I crash my $100k basis Mercedes on the way home from the dealer on the day I bought it as a Christmas present to myself. It went down, say, $60k in value, based on the estimate I got from the dealer to repair it and make it good as new. (For simplicity, ignore that the value of a brand new car that is smashed up the day it's bought may have gone down more than the repair cost). I have a fight with the ins. co. and they don't pay me what I anticipated getting until well into the next year, and supply chain problems delay the repair until the 3rd year. I'd say I have no casualty loss deduction in year one, and no gain or added casualty loss until year 3. No amended returns.
 


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