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The IRS allows a deduction for losses resulting from a casualty or theft of personal-use property. A casualty 
is the damage, destruction, or loss of property resulting from sudden, unexpected, or unusual identifiable 
events, such as car accidents, storms, and floods. Thus, a loss from termites, drought, or disease generally 
is not a deductible casualty loss. The damage must be permanent in nature and not merely a temporary  
decline in value. The amount of the loss generally is the lesser of the adjusted basis (cost) of the property 
or the decrease in fair market value (FMV) due to the casualty or theft. Adjusted basis is determined when 
the casualty occurs. It does not include amounts spent to replace or repair the property. The decrease in  
FMV is often a point of contention between the taxpayer and the IRS. Often, the cost of cleaning up or making 
repairs to restore property to its original condition can be used as a measure of the decrease in the FMV of 
the property. However, to use the cost-of-repairs method to substantiate the amount of the loss, the repair 
expenditures must be made; estimates cannot be used. In addition, objective evidence (e.g., the "Blue Book"  
commonly used to value cars) may help establish FMV. If the loss is significant, the services of a competent 
appraiser should be obtained. For disaster losses in presidentially declared disasters, the IRS is authorized  
to issue guidance (but has not yet done so) allowing appraisals used to obtain federal government aid to 
establish the amount of the casualty loss. In addition to substantiating the deduction claimed for a casualty 
loss, an independent appraisal of a loss may help an individual negotiate a higher settlement or claim with his 
insurance company (versus relying solely on the insurance company's appraiser). Thus, it may make sense  
to incur the cost of an independent appraisal if the loss is significant. Once the amount of the casualty loss is 
determined, it must be reduced by expected insurance or other reimbursements. If personal-use property is 
covered by insurance but no claim is filed, no deduction is allowed for the portion of the loss that would 
otherwise be covered by insurance. If an insurance reimbursement is expected but has not been received 
when the return is filed, the taxpayer must consider the expected reimbursement in determining the amount 
of loss. If the eventual reimbursement turns out to be less than expected, a loss can be claimed in the year it 
is determined the taxpayer cannot reasonably expect any further reimbursement-the original return is not 
amended. The additional loss is treated as if sustained in the year of settlement and is included with any other 
casualty losses for that year.Insurance reimbursements for living expenses following the occurrence of a 
casualty to a taxpayer's principal residence are accounted for independently of the casualty loss computation. 
The taxpayer must report as taxable income any insurance reimbursements that cover normal living 
expenses. However, payments that cover increased temporary living expenses are not taxable income. 
For personal casualties, the loss (after considering insurance proceeds or other reimbursements) from each 
separate theft or casualty must first be reduced by $100. For example, if a taxpayer suffers one loss from a fire 
and another from a flood, the $100 rule applies twice-to the loss from each casualty. After applying the $100 
rule, the taxpayer's personal casualty losses for the year can be deducted only to the extent the total exceeds 
10% of Adjusted Gross Income for the year.