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Old 10-19-2017, 11:53 PM
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Complicated casualty loss before in service

Got a complicated one here, see if I can get an answer.

Say you bought a property mid year as an investment, using a mortgage. Plan was to put a new roof on it, get it ready and rent it.

In the middle of putting a new roof on, a freak storm comes out of nowhere and floods your house while your roof is off while you were literally standing on top of it working on the wood decking under the old roof that's been removed and couldn't pull the tarps fast enough. Now you have to finish the roof, gut and replace a lot of the inside (walls, cabinets, etc), and your timeline gets pushed back so you don't even get it in service until the next year. Oh, and to top it off, your insurance company denies your timely claim, and you have to pay for everything out of pocket.

So, how/when do you account for the casualty loss on your taxes. The year it happened or do you have to wait for the year the asset was placed in service? And how do you even determine how much the loss was - as far as I can tell, you're supposed to take the fair market value of the house without a roof (ie, the FMV of the asset given its condition the moment prior to the casualty loss) minus the FMV of the flooded house without a roof, and if that's so, how the hell do you even come up with those numbers? I have a loss statement from a public adjuster telling me that there was $X in damage and necessary repairs, but I have no appraisals from those two days, and there are no properties like this on the MLS missing roofs that I can just run my own numbers.

Or should I ignore the casualty loss altogether, and instead just add every repair etc to the price I paid for it and use that as my basis (or the lesser of that or the FMV when placed into service) and start my 27.5 years when its placed into service?

And when it comes time to start depreciating your property when its placed in service, what is your basis now? FMV after storm casualty loss plus all the repairs/renovations since then?

If it matters, I'm a RE professional by IRS definition and am in the 25% marginal bracket.

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