Fire Insurance and Tax Implications

[Bob E.]

We recently had a fire at one of our duplexes in Milwaukee.  The upstairs tenant started a fire an while there appears to minimal damage to the framing a total rehab looks like it will run @ 110k.  

My question, since we are long distance land lords, what are the tax implications if I sell the building as is and use the proceeds along with insurance to invest in a new house. I bought the house on a 1031 so the cost basis is around 40k, insurance payout is @ 90k. Would expect between 30-35k from a rehabber (ARV 150K).

My thought is that the insurance proceeds would be a loss recovery so tax free?  and if is sell for 35k that would be a 5k loss against my 40k cost basis.

Any thoughts would be appreciated.