BiggerPockets

Here's my scenario: I had a primary residence I lived in for almost 10 yrs (2000-2010). I then converted it to a rental in 2010. My tenants had a house fire...total loss in Dec 2011. If I collect on insurance an amount greater than my cost into the property and do NOT rebuild, but keep the 38 acre plot of land it was on will I owe taxes? If so what kind? If I later sell the land will I owe a tax? Thanks for any insight.

Am I thinking correctly that my 16 months of renting would be considered non-qualified use for the exemption from capital gains? In that case my 16months renting/137 months of ownership = 11.7% of any gains that would not qualify for the 250k/500k exemption? This scenario would be considered an involuntary conversion and thus considered like a sale? Also, is my basis in the property the_ total price I paid (plus improvements), or is it only the price paid (+ improvements) minus that part of the purchase price attributable to the land portion of the price (like the basis I used to calculate depreciation on the rental)?

Thanks for the link. It answered a lot of questions for me. One thing I wasn't sure of: if my insurance company pays an amount to me for 'loss of rents' but it shows on my statement under the 'Dwelling' category of the policy, do I treat that portion as rental income or as part of the overall dwelling payment for loss of the property (and thus part of the 'sale' price for the involuntary conversion)?

So either or.......my choice?

I think your question is moot. Unless you take action to mitigate your rent loss, then you don't have any rental loss. Loss of rent provisions in your insurance policy are intended to replace the rental income you are not getting while you are putting your property back into service.

Since you don't intend to rebuild, I don't see that the loss of rent provision will apply to your scenario.

Have this conversation with your insurance agent to confirm.

This falls under code section 1033 as an involuntary conversion. Normally no gain is recognized on property used in a trade or business unless some part of the net proceeds is not used in replacement property. If you were to pocket the proceeds and not replace the building (within the 2 year replacement period) you would have a taxable gain. code sec 1033(a)(2)(A)

You can take the 250/500K exclusion on a personal residence that has been involuntarily converted. The sale of the land within a reasonable time would also fall under this provision. The period of time that it was used as a investment real property would not fall under the personal exclusion.

The exact treatment of your situation is not exactly black an white. If you are planning on replacing the building it is very clear. If you sell the land it is pretty clear. If your decision is to not rebuild and keep the land you will be giving up some of your gain exclusion and there are more considerations.