How is property depreciation/basis affected after a fire?

Question

I am trying to sell a commercial investment property and am wondering the tax implications.

Here is the example.

I had a long term tenant, 40 + years.  Original Value of Building in 1970 was like $500k.

In 2007 there was a fire and the building was a total loss and I rebuilt the building 8 years ago after a fire.

If i am planning selling the building how is my basis factored?  Will all the depreciation i had written off the past 33 years prior to the building burning down essentially up in smoke?

Thanks!

Brandon Hall · Answer

@Ned Carey you are correct, it is not considered income unless the insurance payout received exceeds your basis in the property.

Michael DiFranco · Answer

@Brandon Hall and @Ned Carey thanks for info, very helpful..yes depreciation is factored..definitely planning on talking to my accountant but i thought it was an interesting untouched (i think) topic that could shed light for others

Ned Carey · Answer

@Brandon Hall in the example you use are insurance proceeds considered income?

My guess is no. You now have an asset worth $48k, and you have a cash asset of $452K ($450 + $2K scrap value)

Brandon Hall · Answer

@Michael DiFranco did you use a CPA to report your taxes surrounding this issue? If so, that's the first person I'd check with.

Generally, if you have a casualty or theft loss, you decrease the basis in your property by any insurance or other reimbursement received and by any deductible loss not covered by insurance (i.e. a reportable loss).

You will then increase your basis in the property by the amount you spend on repairs that "substantially prolong the life" of the property, increase its value, or adapt it to a different use. You will need to compare the repaired property to the property before the casualty.

So for a very simple example: you originally purchased the property for $500k, it gets wipes out, you determine that the salvage value is $2k and insurance proceeds are $450k. Your adjusted basis is $48k ($500k - $2k - $450k) and assuming this is a deductible loss, you would write it off on your returns bringing your adjusted basis to $0. When you rebuild, your basis is going to be the capitalized costs associated with the rebuild.

If you have to factor in depreciation (likely you do), it becomes a more complicated issue.

See Publication 547 for more details.

Michael DiFranco · Answer

Thanks for the reply!

Lets say I sell the property for 1.1. mil.

It cost 500k to rebuild.

Luka Milicevic · Answer

What was your purchase price?

What was the cost to rebuild when it burned down?

How is property depreciation/basis affected after a fire?

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