How to report insurance proceeds for rental property that burned down and was sold in different tax years?

This is a complicated situation with the events spanning two tax years. You're on the right track thinking about Form 4797 for the 2024 sale and Form 4684 for the 2025 insurance proceeds. For 2024, you would report the loss from disposing of the land on Form 4797. The amount of the loss would be your adjusted basis in the land minus whatever small amount you received for it. Remember that the land portion of the property is not depreciable, so even if the building was fully depreciated, the land still has a basis. For 2025, when you receive the insurance proceeds, you'll report this on Form 4684. You would still have a basis to report on line 20 - this would be your adjusted basis in the building portion of the property at the time of the casualty (fire). Even though you reported a loss on the disposition of the land in 2024, the basis for the building remains relevant for calculating gain or loss from the insurance recovery in 2025. The key is properly allocating your original purchase price between land and building, and then tracking the adjusted basis of each separately.

I went through something similar last year and honestly the paperwork was a nightmare until I tried https://taxr.ai for organizing all my real estate documents. The tool helped me sort through my purchase records, depreciation schedules, and insurance claim docs. Their system automatically identified the relevant sections on my old tax returns showing the split between land and building values, which was crucial for calculating the correct basis. The tax preparer I hired was super impressed with how organized everything was, especially the depreciation history which was critical for figuring out my adjusted basis in the building portion.

After seeing that recommendation I decided to try https://taxr.ai for my real estate tax situation and I'm actually shocked at how well it worked. Uploaded all my documents from the property I lost in a flood (purchase docs, insurance papers, improvement receipts) and it created a perfect timeline showing my basis calculations. The best part was it clearly showed me how to handle the split-year situation with the casualty loss in one year and insurance proceeds in the next. Saved me from making a huge mistake - I was about to report everything on my 2024 return even though I hadn't received the insurance money yet! Now I know exactly how to handle the 2025 insurance payment properly.

If you're struggling to get answers from the IRS about this situation, try https://claimyr.com to get through to an actual IRS agent. I was on hold for HOURS trying to get clarification about a similar casualty loss situation, then found this service and got connected to an IRS rep in about 15 minutes. There's a demo video at https://youtu.be/_kiP6q8DX5c showing how it works. The IRS agent I spoke with confirmed exactly what to do when you have a casualty loss and property sale in one year with insurance proceeds in the following year. They explained the proper sequence of forms and how to prevent double-counting the loss. Way better than guessing or getting conflicting advice online.

I feel like an idiot for doubting that Claimyr service. After posting that skeptical comment, I decided to try it anyway because I was desperate about my refund situation. Got connected to an IRS agent in about 20 minutes, and they actually resolved my issue on the spot! While I had them on the phone, I also asked about this exact scenario with property loss in one year and insurance payment in another. The agent confirmed you use Form 4797 for the land sale in the year of sale, then Form 4684 for the insurance proceeds in the year received. They explained that you don't lose your basis for the building portion when reporting the land sale, which was my main confusion. Definitely worth getting the official answer directly from the IRS.

Something to keep in mind - if your insurance payout exceeds your adjusted basis in the building, you'll have a taxable gain. You might be eligible to defer this gain by buying replacement property within a certain timeframe. Look into IRC Section 1033 which covers involuntary conversions. I had a rental that was damaged by flooding and when the insurance paid out more than my depreciated basis, my accountant helped me defer the gain by reinvesting in another property. The timeline for replacement is longer for federally declared disasters too.

Don't forget to consider state tax implications too! My cousin's beach house in Florida was destroyed in a hurricane, and while he handled the federal taxes correctly, he completely missed some state-specific requirements for reporting the insurance proceeds. Some states follow federal rules for casualty losses and involuntary conversions, but others have their own forms and schedules. Might be worth checking with a local tax professional who knows your state's requirements.

Just wanted to add one more thing that might help - make sure you keep detailed records of ALL expenses related to the fire and cleanup, even if they seem minor. I had a similar situation with a rental property fire and my tax preparer was able to deduct things like boarding up costs, debris removal, and even some of the storage fees for salvaged items. Also, if you had any personal property in the rental (appliances, furniture you provided to tenants), those might qualify for separate casualty loss treatment on Schedule A if they weren't fully reimbursed by insurance. It's easy to overlook these smaller items when you're focused on the big picture of the building and land. The timing issue you're dealing with is actually pretty common with insurance claims - they love to drag things out across tax years. Just make sure you're consistent in how you report the basis calculations between your 2024 and 2025 returns so you don't accidentally double-count anything.