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.
Tax Eplanation from my CPA
Information provided by the C.P.A. firm of John J. Robinson, P.C.
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