How do you handle a casualty loss on a rental building after a fire or storm?

The formula for rental property

IRS Publication 547 sets out three steps: determine your adjusted basis before the casualty, determine the decrease in fair market value, and from the smaller of the two subtract any insurance or other reimbursement you received or expect to receive (IRS Publication 547).

For business or income-producing property such as a rental that is stolen or completely destroyed, Publication 547 says the decrease in value is not considered. The loss is the adjusted basis, minus any salvage value, minus insurance received or expected. Rental losses are figured in Section B of Form 4684, as Publication 527 notes (IRS Publication 527).

Two things surprise owners. Repair bills are not the loss: Publication 547 says the cost of repairing damaged property is not part of a casualty loss, though repair cost can be used as a measure of the drop in value when the repairs are actually made, necessary, not excessive and limited to the damage. And a part of an old, mostly depreciated building may have a small adjusted basis, so the deductible loss can be far below the repair bill.

When insurance creates a gain

Publication 547 says that if your reimbursement is more than your adjusted basis in the property, you have a gain, even if the decrease in fair market value is smaller than your adjusted basis. With older buildings this is common: the insurer pays to rebuild at today's prices, while your basis in the damaged part has been depreciated for years.

You may be able to postpone that gain by buying replacement property. Publication 547 says the replacement period begins on the date the property was damaged or destroyed and generally ends 2 years after the close of the first tax year in which any part of the gain is realized. For an owner-investor, the replacement must be similar or related in service or use, judged by its service to you, its business risks, and what it demands of you in management, services and tenant relations.

Two worked examples

Example a made-up fire completely destroys the kitchen and finishes in one unit of a 14 unit building. The owner's records allocate $30,000 of original cost to that unit's interior, with $18,000 of depreciation already taken, so its adjusted basis is $12,000. There is no salvage. The insurer pays $41,000 to restore it. Because $41,000 is more than $12,000, there is no deductible loss; there is a $29,000 gain, which the owner may be able to postpone by restoring the unit within the replacement period. How much is postponed depends on what the restoration costs, which the tax preparer works out.

Example a made-up storm damages a parking structure with an adjusted basis of $25,000. An appraisal shows the property's value fell by $16,000. The insurance deductible is $5,000 and the insurer pays $11,000. The loss is the smaller of $25,000 and $16,000, which is $16,000, minus $11,000 of insurance, for a $5,000 deductible casualty loss on the rental.

What happens to the building's basis

Publication 547 says you must decrease your basis by any insurance or other reimbursement you receive and by any deductible loss, and that amounts you then spend on repairs to restore the property to its pre-casualty condition increase your adjusted basis.

The disposition rules treat a casualty as a disposition of the damaged part even if you never make the partial disposition election, under 26 CFR 1.168(i)-8(d)(1)-8). In practice, the destroyed part comes off the depreciation schedule and the restoration goes on as a new asset. Your tax preparer will set the exact entries.

What to do in the first weeks

1. Photograph and document the damage before cleanup, and keep every contractor estimate.
2. Pull the adjusted basis of the damaged part: purchase records, improvement invoices and the depreciation taken on them.
3. Record the expected insurance as a receivable in the property's books, separate from rent.
4. Track restoration spending in its own account, so the replacement amount needed to postpone a gain is easy to show.
5. If the area is a federally declared disaster, tell your preparer: Publication 547 has special rules and timing for disaster losses.

Recording the claim in DoorKeeping

Each property in DoorKeeping has its own ledger, bank feed and documents, so the insurance claim, the adjuster's report, the restoration invoices and the insurance deposit sit with the building they belong to. Work orders and vendor job links keep the repair jobs organized, and the month-end close shows any insurance money still expected. DoorKeeping does not figure the casualty loss or gain or give tax advice; it hands your preparer clean numbers.

Sources

1. IRS, Publication 547, Casualties, Disasters, and Thefts, read Oct 30, 2026
2. IRS, Publication 527, Residential Rental Property, read Oct 30, 2026
3. 26 CFR 1.168(i)-8, Dispositions of MACRS property (Cornell LII), read Oct 30, 2026

Questions

Is the repair bill my casualty loss?

No. Publication 547 says repair cost is not part of a casualty loss, though it can be used to measure the drop in value if certain conditions are met. The loss starts from adjusted basis.

Can insurance money on a rental be taxable?

Yes, if it is more than your adjusted basis in the damaged property. You may be able to postpone the gain by buying or building similar replacement property within the replacement period.

How long do I have to replace damaged rental property to postpone a gain?

Generally until 2 years after the close of the first tax year in which any part of the gain is realized, per Publication 547. Disaster areas and extensions have their own rules.