Insurance claim & Taxes

[Chris Fusco]

Hello,

Just finished my 2022 taxes but it made me realize I have a situation for 2023 taxes that I don't know how I'm going to handle. Here's the situation:

- Had a pipe freeze during a cold snap, led to fairly extensive damage during the thaw (ceiling collapsed in 3 rooms)

- Filed insurance claim, was covered

- Have a contractor that wants me to buy 3 other properties from him, so he fixed it for me at cost

- Deductible is $5K

- Actually ended up making money somehow

Math:

   - Cost from contractor $22K

  - Cost insurance came back with $29K

  - Deductible $5k

  - So I actually made $2k ( 29 - 5 = 24 [check] ; contractor cost 22)

My question is how to handle on taxes? Does the 22K count as expenses (or capitalized, depending on scope), Does $5K count as a loss I can write off? Do I report $2K income? 

Thank you in advance 

Chris Fusco 

[Marc Rice]

You really should consult a CPA for this. If you paid $22k and received income for $29k, I would assume you would have a $7k gain...the deductible shouldn't matter. This is not tax or legal advise, please consult a CPA.

[Linda Weygant]

The excess of a claim payout, less the expenses associated with fixing the damage, become an adjustment to basis of the property.

[Chris Fusco]

Thank you for the insight!

Even if repairing the property didn't "make it better". The repairs just brought it back to it's original state. So you're saying the basis on which I depreciate every year should go up by the excess amount? Let's say it's a $100K property, land is worth $20K, so you depreciate the remaining $80 on your schedule  over the next 27.5 years. In my example, that $80 should become an $82?

Would that only be the case if those repairs are considered "capital improvements"?