Rental building burned down. Landlord got insurance payout of $300K in 2009 in excess of their 200K basis. Decided not to replace the property and fixed it up to sell building lot instead. Sold it in 2010 for $30K. There were $40K in costs associated with demolition.
I was about to assure the landlord that nothing taxable happened in 2009, that the insurance payouts reduced the basis and the gain will be reportable when they dispose of the property in 2010.
But do I reduce the basis, at least, to 0?
Do I reduce the basis BEYOND 0 and report gain in 2009?