Water Damaged Building Sale and Tax

[vdo]

CA

What are the implications of a building insurance settlement when it comes to tax?

Water damage occurred while we were under contract to sell a building. The buyer was looking for a deduction in price in exchange for leaving the building as is. We had planned to do a 1031 exchange with the sale and now are worried that taking the settlement would trigger a taxable event. For example, the sale price before water damage was $200k, we might get $150 from the buyer and $50 from insurance. If we sell it to the buyer, we can only push $150 into a 1031 exchange. This would force a $50k taxable event.

Any idea how to address this? thanks

 

[adjusterjack]

Any idea how to address this?

With a tax pro who specializes in 1031 exchanges.

 

[Taxing Matters]

CA

What are the implications of a building insurance settlement when it comes to tax?

Water damage occurred while we were under contract to sell a building. The buyer was looking for a deduction in price in exchange for leaving the building as is. We had planned to do a 1031 exchange with the sale and now are worried that taking the settlement would trigger a taxable event. For example, the sale price before water damage was $200k, we might get $150 from the buyer and $50 from insurance. If we sell it to the buyer, we can only push $150 into a 1031 exchange. This would force a $50k taxable event.

Any idea how to address this? thanks

What settlement is this? Is this a payment from your own insurance policy on the building? A settlement with the person/entity that was responsible for the damage (with that person’s or entity's insurance paying it for him/it)? Or something else?

 

[LdiJ]

With a tax pro who specializes in 1031 exchanges.

I agree, its not a simple situation and you want advice from someone who is an expert on the matter at hand. As a tax professional who is familiar with 1031 exchanges (but not an expert) I am guessing that it would be in your best interest to repair the damage and sell at FMV, but you really need the opinion of a tax pro who is an expert on that issue.