Exit strategy after total loss fire

[Tate Kralik]

I recently had a total loss fire in one of my rental properties. Unfortunately, it was an intentional fire set by a tenant getting evicted. Fortunately everyone was ok and the insurance company has been no problem at all giving a full pay out which is valued at the purchase price in 2020.

The pay out is not enough to repair/rebuild as the house was built in the 1920s and would not make sense in the location it is in. I'm wanting to wash my hands of the property and get out with the most capital intact. I'm looking to see what my options are for this type of situation. 

What options do I have to exit this investment? Can I just sell the property as is? Is it my responsibility to do a demolition/clean up then sell the land? Looking forward to what advice everyone might have. 

Bonus question: what kind of impact does this have on my taxes and how do I file this?

[Chris Seveney]

@Tate Kralik

1. Yes you can sell a fire damaged property and keep the insurance money. The jurisdiction of its a safety hazard or blight my require it to be demolished and you do not want to start getting fined for it, so that is something I would consider. It’s also an insurance issue possibly if someone got hurt on the property. When it’s vacant land you typically do not carry instance on land.

2. Regarding taxation, talk to your cpa on how insurance proceeds then the sale of a property after being damaged impacts your cost basis.

So for me, spend the $ to demo the property and sell the land.

[Ashish Acharya]

For taxes, if the insurance payout is more than your adjusted basis (purchase price minus depreciation), you’ll have a casualty gain. If it's less, you’ll have a casualty loss, which can be deductible. You report this on Form 4684. If it's a gain, you could defer taxes by reinvesting in a similar property through a Section 1033 exchange.

For demolition costs, they can either be deducted or added to the land's basis if you sell.

[Adam Bartomeo]

You can sell as is or tear it down. It would be more appealing to the buyer if it was an empty lot.

[Tate Kralik]

Thanks for the helpful information! 

Has anyone ever used the company We Buy Fire Damaged Houses. Seems like it could be an easy exit with no cost to me to demo. I am having difficulty finding reviews though.

[Michael Quarles]

Sell and when you do remember there is a 10% hold by the insurance company until repairs are complete and that’s transferable to a buyer.  

And I wouldn’t be so forgiving to the tenant.  

[Quentin Ambrose]

You can definitely sell as is. Besides fixing it up that might be your only option. Depending on the extent of the damage the City/Village might condemn the property and force you to tear it down if you let it sit to long.

[Henry T.]

Well, let's all hope the tenant is safe and has found new accomodations in a prison cell.

I personally would want it "as is" to decide for myself how to proceed. A builder can demo that house much cheaper than you could.