Our investment property burned down! So many questions...

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Our investment property burned down! So many questions...

Levi Lais
Member since 2018 · 6 posts · 3 votes

First, I'll lay out the facts and then I'll follow that with the questions...

The Scenario

1. We purchased a house for $467K as an investment property in January, 2022 (the 3rd in our portfolio and in no way would be confused with a primary residence). The land value according to the assessor was $197,500 at the time of purchase. Our plan is to convert a SFA into a "Monster House" - convert the basement and the detached garage into an attached and a detached ADU.
2. We Invested approx. $20K into capital improvements. (about $5K of that going to the detached garage a basement - including permits)
3. Then the house burns down in February 2022 (not touching the garage, so we can keep working on the garage).  The adjusters and investigators do their thing and the max insurance payout of $665K to fully rebuild (all but 1 wall) is expected to be hit.
4. The house projects to finish being rebuilt in May, 2023 (this is when it's projected to be done)
5. Note that no renters have occupied the house as we were about 2 weeks away from posting it.  Thus, no "lost rent" payouts have been made and no "in service" timelines have been hit.
6. The detached ADU will likely incur an additional $100K and be completed this fall
7. The attached ADU will likely incur an additional $50K and will now be completed in early 2024.
8. As a bit of a summary - I have figured a pre-fire basis of approx. $249.5K, $15K of that was lost to the fire, the home was replaced by a $665K rebuild* paid for by insurance, and $150K or so in additional investments that pre-date and will post-date the fire will go towards the 2 ADUs.

My Questions

1. How is basis/depreciation handled in this scenario?  Does the amount that the insurance company is paying to rebuild* the house count towards the basis?  
2. Do we have to pay taxes on the insurance payout?
3. What's th best practice for writing off larger ADU-type capital expenses?  Do we wait until the ADU is put into service in order to start the 27.5 year depreciation on those improvements even tho they partially pre-date the fire?
4. Can we (and if so, how can we) write off the $30K+ that we've burned in carrying costs on mortgage/HELOC taxes/interest

1Reply
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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
3y

This is a highly nuanced set of facts/circumstances and it'd be difficult/impossible to answer without a full dynamic discussion.  The answer to almost every question is "It Depends"

If your CPA has experience in real estate issues as well as casualty losses, they should be able to discuss and explain all of these things to you.  

Because the answers to some of these questions is dependent on your personal set of facts and circumstances, the only person who is going to be able to answer this is your tax professional.

Crowd sourcing this type of nuanced and difficult area of tax law probably won't be a great idea.  Even if you had each person who experienced such a situation come and answer, many of them will have different results and answers based on their own specific set of facts and circumstances.  In my opinion, filling your head with all the POSSIBLE answers is not nearly as helpful as getting the answers associated with YOUR situation.

Podcast Guest on Show #244
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7 Replies

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  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    Talk with your Tax accountant.  

    1Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    This is a discussion that should have occurred in February or March if 2022. B

    0Reply
  • Levi Lais
    OP
    Member since 2018 · 6 posts · 3 votes
    3y
    Quote from @Henry Clark:

    This is a discussion that should have occurred in February or March if 2022. B


     This is unhelpful.

    0Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    The question is why haven’t you contacted your tax accountant.  If you’re trying to get free tax advice from strangers on a forum. You need to evaluate your business model and team members. 

    1Reply
  • Levi Lais
    OP
    Member since 2018 · 6 posts · 3 votes
    3y
    Quote from @Henry Clark:

    The question is why haven’t you contacted your tax accountant.  If you’re trying to get free tax advice from strangers on a forum. You need to evaluate your business model and team members. 

    Who said I haven’t talked with my tax accountant?  Where in this post did I lay out my business model or talk about anyone on my team?  This is a very complex situation, and I’m looking to get an opinion from someone who has potentially had similar things happen to them.  Strangers or not - BiggerPockets is a great place to ask these kinds of questions. Please stop trolling my post if you’re not going to be helpful. 

    2Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    3y

    This is a highly nuanced set of facts/circumstances and it'd be difficult/impossible to answer without a full dynamic discussion.  The answer to almost every question is "It Depends"

    If your CPA has experience in real estate issues as well as casualty losses, they should be able to discuss and explain all of these things to you.  

    Because the answers to some of these questions is dependent on your personal set of facts and circumstances, the only person who is going to be able to answer this is your tax professional.

    Crowd sourcing this type of nuanced and difficult area of tax law probably won't be a great idea.  Even if you had each person who experienced such a situation come and answer, many of them will have different results and answers based on their own specific set of facts and circumstances.  In my opinion, filling your head with all the POSSIBLE answers is not nearly as helpful as getting the answers associated with YOUR situation.

    Podcast Guest on Show #244
    3Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Levi Lais:

    First, I'll lay out the facts and then I'll follow that with the questions...

    The Scenario

    1. We purchased a house for $467K as an investment property in January, 2022 (the 3rd in our portfolio and in no way would be confused with a primary residence). The land value according to the assessor was $197,500 at the time of purchase. Our plan is to convert a SFA into a "Monster House" - convert the basement and the detached garage into an attached and a detached ADU.
    2. We Invested approx. $20K into capital improvements. (about $5K of that going to the detached garage a basement - including permits)
    3. Then the house burns down in February 2022 (not touching the garage, so we can keep working on the garage).  The adjusters and investigators do their thing and the max insurance payout of $665K to fully rebuild (all but 1 wall) is expected to be hit.
    4. The house projects to finish being rebuilt in May, 2023 (this is when it's projected to be done)
    5. Note that no renters have occupied the house as we were about 2 weeks away from posting it.  Thus, no "lost rent" payouts have been made and no "in service" timelines have been hit.
    6. The detached ADU will likely incur an additional $100K and be completed this fall
    7. The attached ADU will likely incur an additional $50K and will now be completed in early 2024.
    8. As a bit of a summary - I have figured a pre-fire basis of approx. $249.5K, $15K of that was lost to the fire, the home was replaced by a $665K rebuild* paid for by insurance, and $150K or so in additional investments that pre-date and will post-date the fire will go towards the 2 ADUs.

    My Questions

    1. How is basis/depreciation handled in this scenario?  Does the amount that the insurance company is paying to rebuild* the house count towards the basis?  
    2. Do we have to pay taxes on the insurance payout?
    3. What's th best practice for writing off larger ADU-type capital expenses?  Do we wait until the ADU is put into service in order to start the 27.5 year depreciation on those improvements even tho they partially pre-date the fire?
    4. Can we (and if so, how can we) write off the $30K+ that we've burned in carrying costs on mortgage/HELOC taxes/interest


     just hire public adjuster, dont do DIY

    0Reply
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