25.   Nonbusiness Casualty and Theft Losses

What's New

New Section C of Form 4684 for Ponzi-type investment schemes. Section C of Form 4684 is new for 2013. You must complete Section C if you are claiming a theft loss deduction due to a Ponzi-type investment scheme and are using Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58. Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. You do not need to complete Appendix A. For details, see Losses from Ponzi-type investment schemes , in this chapter.

Introduction

This chapter explains the tax treatment of personal (not business or investment related) casualty losses, theft losses, and losses on deposits.

The chapter also explains the following 
topics.

  • How to figure the amount of your loss.

  • How to treat insurance and other reimbursements you receive.

  • The deduction limits.

  • When and how to report a casualty or theft.

Forms to file.    When you have a casualty or theft, you have to file Form 4684. You will also have to file one or more of the following forms.
  • Schedule A (Form 1040), Itemized Deductions

  • Schedule D (Form 1040), Capital Gains and Losses

Condemnations.   For information on condemnations of property, see Involuntary Conversions in chapter 1 of Publication 544, Sales and Other Disposition of Assets.

Workbook for casualties and thefts.    Publication 584 is available to help you make a list of your stolen or damaged personal-use property and figure your loss. It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles.

Business or investment-related losses.   For information on a casualty or theft loss of business or income-producing property, see Publication 547, Casualties, Disasters, and Thefts.

Useful Items - You may want to see:

Publication

  • 544 Sales and Other Dispositions 
    of Assets

  • 547 Casualties, Disasters, and  
    Thefts

  • 584 Casualty, Disaster, and Theft  
    Loss Workbook (Personal-Use 
    Property)

Form (and Instructions)

  • Schedule A (Form 1040) Itemized Deductions

  • Schedule D (Form 1040) Capital Gains and Losses

  • 4684 Casualties and Thefts

Casualty

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

  • A sudden event is one that is swift, not gradual or progressive.

  • An unexpected event is one that is ordinarily unanticipated and unintended.

  • An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.

Deductible losses.   Deductible casualty losses can result from a number of different causes, including the following.
  • Car accidents (but see Nondeductible losses , next, for exceptions).

  • Earthquakes.

  • Fires (but see Nondeductible losses , next, for exceptions).

  • Floods.

  • Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses in Publication 547.

  • Mine cave-ins.

  • Shipwrecks.

  • Sonic booms.

  • Storms, including hurricanes and tornadoes.

  • Terrorist attacks.

  • Vandalism.

  • Volcanic eruptions.

Nondeductible losses.   A casualty loss is not deductible if the damage or destruction is caused by the following.
  • Accidentally breaking articles such as glassware or china under normal conditions.

  • A family pet (explained below).

  • A fire if you willfully set it or pay someone else to set it.

  • A car accident if your willful negligence or willful act caused it. The same is true if the willful act or willful negligence of someone acting for you caused the accident.

  • Progressive deterioration (explained later).

Family pet.   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met.

Example.

Your antique oriental rug was damaged by your new puppy before it was housebroken. Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss.

Progressive deterioration.    Loss of property due to progressive deterioration is not deductible as a casualty loss. This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. The following are examples of damage due to progressive deterioration.
  • The steady weakening of a building due to normal wind and weather conditions.

  • The deterioration and damage to a water heater that bursts. However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty.

  • Most losses of property caused by droughts. To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit.

  • Termite or moth damage.

  • The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss.

Damage from corrosive drywall.   Under a special procedure, you may be able to claim a casualty loss deduction for amounts you paid to repair damage to your home and household appliances that resulted from corrosive drywall. For details, see Publication 547.

Theft

A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the laws of the state where it occurred and it must have been done with criminal intent. You do not need to show a conviction for theft.

Theft includes the taking of money or property by the following means.

  • Blackmail.

  • Burglary.

  • Embezzlement.

  • Extortion.

  • Kidnapping for ransom.

  • Larceny.

  • Robbery.

The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.

Decline in market value of stock.   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. You report a capital loss on Schedule D (Form 1040). For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550.

Mislaid or lost property.   The simple disappearance of money or property is not a theft. However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Sudden, unexpected, and unusual events are defined earlier.

Example.

A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. The diamond falls from the ring and is never found. The loss of the diamond is a casualty.

Losses from Ponzi-type investment schemes.   If you had a loss from a Ponzi-type investment scheme, see:
If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. Skip lines 19 to 27. Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. You do not need to complete Appendix A. For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684.

  If you choose not to use the procedures in Revenue Procedure 2009-20, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate.

Loss on Deposits

A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. If you incurred this type of loss, you can choose one of the following ways to deduct the loss.

  • As a casualty loss.

  • As an ordinary loss.

  • As a nonbusiness bad debt.

Casualty loss or ordinary loss.   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. The choice is generally made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. Once you make this choice, you cannot change it without permission from the Internal Revenue Service.

  If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. Your loss is subject to the 2%-of-adjusted-gross-income limit. You cannot choose to claim an ordinary loss if any part of the deposit is federally insured.

Nonbusiness bad debt.   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year.

How to report.   The kind of deduction you choose for your loss on deposits determines how you report your loss. If you choose:
  • Casualty loss — report it on Form 4684 first and then on Schedule A (Form 1040).

  • Ordinary loss — report it on Schedule A (Form 1040) as a miscellaneous itemized deduction.

  • Nonbusiness bad debt — report it on Form 8949 first and then on Schedule D (Form 1040).

More information.   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684 or Deposit in Insolvent or Bankrupt Financial Institution in Publication 550.

Proof of Loss

To deduct a casualty or theft loss, you must be able to prove that you had a casualty or theft. You also must be able to support the amount you take as a deduction.

Casualty loss proof.   For a casualty loss, your records should show all the following.

  • The type of casualty (car accident, fire, storm, etc.) and when it occurred.

  • That the loss was a direct result of the casualty.

  • That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage.

  • Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.

Theft loss proof.   For a theft loss, your records should show all the following.
  • When you discovered that your property was missing.

  • That your property was stolen.

  • That you were the owner of the property.

  • Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.

It is important that you have records that will prove your deduction. If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it.

Figuring a Loss

Figure the amount of your loss using the following steps.

  1. Determine your adjusted basis in the property before the casualty or theft.

  2. Determine the decrease in fair market value of the property as a result of the casualty or theft.

  3. From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive.

For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss.

Gain from reimbursement.   If your reimbursement is more than your adjusted basis in the property, you have a gain. This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. See Publication 547 for more information on how to treat a gain from a reimbursement for a casualty or theft.

Leased property.   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive.

Decrease in Fair Market Value

Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts.

The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft.

FMV of stolen property.   The FMV of property immediately after a theft is considered to be zero, since you no longer have the property.

Example.

Several years ago, you purchased silver dollars at face value for $150. This is your adjusted basis in the property. Your silver dollars were stolen this year. The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. Your theft loss is $150.

Recovered stolen property.   Recovered stolen property is your property that was stolen and later returned to you. If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. Use this amount to refigure your total loss for the year in which the loss was deducted.

  If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. But report the difference only up to the amount of the loss that reduced your tax. For more information on the amount to report, see Recoveries in chapter 12.

Figuring Decrease in FMV— Items To Consider

To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. However, other measures can also be used to establish certain decreases.

Appraisal.   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. The appraiser must recognize the effects of any general market decline that may occur along with the casualty. This information is needed to limit any deduction to the actual loss resulting from damage to the property.

  Several factors are important in evaluating the accuracy of an appraisal, including the following.
  • The appraiser's familiarity with your property before and after the casualty or theft.

  • The appraiser's knowledge of sales of comparable property in the area.

  • The appraiser's knowledge of conditions in the area of the casualty.

  • The appraiser's method of appraisal.

  
You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. For more information on disasters, see Disaster Area Losses, in Pub. 547.

Cost of cleaning up or making repairs.   The cost of repairing damaged property is not part of a casualty loss. Neither is the cost of cleaning up after a casualty. But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions.
  • The repairs are actually made.

  • The repairs are necessary to bring the property back to its condition before the casualty.

  • The amount spent for repairs is not excessive.

  • The repairs take care of the damage only.

  • The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty.

Landscaping.   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. You may be able to measure your loss by what you spend on the following.
  • Removing destroyed or damaged trees and shrubs minus any salvage you receive.

  • Pruning and other measures taken to preserve damaged trees and shrubs.

  • Replanting necessary to restore the property to its approximate value before the casualty.

Car value.    Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. You can use the book's retail values and modify them by such factors as mileage and the condition of your car to figure its value. The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. If your car is not listed in the books, determine its value from other sources. A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value.

Figuring Decrease in FMV— Items Not To Consider

You generally should not consider the following items when attempting to establish the decrease in FMV of your property.

Cost of protection.   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. The amount you spend on insurance or to board up your house against a storm is not part of your loss.

  If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. An example would be the cost of a dike to prevent flooding.

Exception.   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments. See Disaster Area Losses in Publication 547.

Incidental expenses.   Any incidental expenses you have due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss.

Replacement cost.   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss.

Sentimental value.   Do not consider sentimental value when determining your loss. If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property.

Decline in market value of property in or near casualty area.   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. You have a loss only for actual casualty damage to your property. However, if your home is in a federally declared disaster area, see Disaster Area Losses in Publication 547.

Costs of photographs and appraisals.    Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful.

   Appraisals are used to figure the decrease in FMV because of a casualty or theft. See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals.

  The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). For information about miscellaneous deductions, see chapter 28.

Adjusted Basis

Adjusted basis is your basis in the property (usually cost) increased or decreased by various events, such as improvements and casualty losses. For more information, see chapter 13.

Insurance and Other Reimbursements

If you receive an insurance payment or other type of reimbursement, you must subtract the reimbursement when you figure your loss. You do not have a casualty or theft loss to the extent you are reimbursed.

If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. You must reduce your loss even if you do not receive payment until a later tax year. See Reimbursement Received After Deducting Loss , later.

Failure to file a claim for reimbursement.   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Otherwise, you cannot deduct this loss as a casualty or theft loss. However, this rule does not apply to the portion of the loss not covered by insurance (for example, a deductible).

Example.

You have a car insurance policy with a $1,000 deductible. Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the deduction limits discussed later). This is true even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible.

Types of Reimbursements

The most common type of reimbursement is an insurance payment for your stolen or damaged property. Other types of reimbursements are discussed next. Also see the Instructions for Form 4684.

Employer's emergency disaster fund.   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. Take into consideration only the amount you used to replace your destroyed or damaged property.

Example.

Your home was extensively damaged by a tornado. Your loss after reimbursement from your insurance company was $10,000. Your employer set up a disaster relief fund for its employees. Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. You received $4,000 from the fund and spent the entire amount on repairs to your home. In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. Your casualty loss before applying the deduction limits discussed later is $6,000.

Cash gifts.   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. This applies even if you use the money to pay for repairs to property damaged in the disaster.

Example.

Your home was damaged by a hurricane. Relatives and neighbors made cash gifts to you that were excludable from your income. You used part of the cash gifts to pay for repairs to your home. There were no limits or restrictions on how you could use the cash gifts. Because it was an excludable gift, the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home.

Insurance payments for living expenses.   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations.
  • You lose the use of your main home because of a casualty.

  • Government authorities do not allow you access to your main home because of a casualty or threat of one.

Inclusion in income.   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. Report this amount on Form 1040, line 21. However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. See Qualified disaster relief payments, under Disaster Area Losses in Publication 547.

  A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. Generally, these expenses include the amounts you pay for the following.
  • Rent for suitable housing.

  • Transportation.

  • Food.

  • Utilities.

  • Miscellaneous services.

Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one.

Example.

As a result of a fire, you vacated your apartment for a month and moved to a motel. You normally pay $525 a month for rent. None was charged for the month the apartment was vacated. Your motel rent for this month was $1,200. You normally pay $200 a month for food. Your food expenses for the month you lived in the motel were $400. You received $1,100 from your insurance company to cover your living expenses. You determine the payment you must include in income as follows.

1) Insurance payment for living 
expenses
$1,100
2) Actual expenses during the month you are unable to use your home because of fire 1,600  
3) Normal living expenses 725  
4) Temporary increase in living  
expenses: Subtract line 3 
from line 2
875
5) Amount of payment includible  
in income: Subtract line 4  
from line 1
$ 225

Tax year of inclusion.   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment.

Example.

Your main home was destroyed by a tornado in August 2011. You regained use of your home in November 2012. The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. You include this amount in income on your 2012 Form 1040. If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040.

Disaster relief.   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss unless they are replacements for lost or destroyed property.

Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster are not taxable income to you. For more information, see Disaster Area Losses in Publication 547.

Disaster unemployment assistance payments are unemployment benefits that are taxable.

Generally, disaster relief grants and qualified disaster mitigation payments made under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) are not includible in your income. See Disaster Area Losses in Publication 547.

Reimbursement Received After Deducting Loss

If you figured your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you receive your actual reimbursement. This section explains the adjustment you may have to make.

Actual reimbursement less than expected.   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement.

Example.

Your personal car had an FMV of $2,000 when it was destroyed in a collision with another car in 2012. The accident was due to the negligence of the other driver. At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. You did not have a deductible loss in 2012.

In January 2013, the court awarded you a judgment of $2,000. However, in July it became apparent that you will be unable to collect any amount from the other driver. You can deduct the loss in 2013 subject to the limits discussed later.

Actual reimbursement more than expected.   If you later receive more reimbursement than you expected after you claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. You do not refigure your tax for the year you claimed the deduction. For more information, see Recoveries in chapter 12.

If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. See Figuring a Gain in Publication 547 for more information on how to treat a gain from the reimbursement of a casualty or theft.

Actual reimbursement same as expected.   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss.

Example.

In December 2013, you had a collision while driving your personal car. Repairs to the car cost $950. You had $100 deductible collision insurance. Your insurance company agreed to reimburse you for the rest of the damage. Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013.

Due to the $100 rule (discussed later under Deduction Limits ), you cannot deduct the $100 you paid as the deductible. When you receive the $850 from the insurance company in 2014, do not report it as income.

Single Casualty on Multiple Properties

Personal property.   Personal property is any property that is not real property. If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. Then combine these separate losses to figure the total loss from that casualty or theft.

Example.

A fire in your home destroyed an upholstered chair, an oriental rug, and an antique table. You did not have fire insurance to cover your loss. (This was the only casualty or theft you had during the year.) You paid $750 for the chair and you established that it had an FMV of $500 just before the fire. The rug cost $3,000 and had an FMV of $2,500 just before the fire. You bought the table at an auction for $100 before discovering it was an antique. It had been appraised at $900 before the fire. You figure your loss on each of these items as follows:

    Chair Rug Table
1) Basis (cost) $750 $3,000 $100
2) FMV before fire $500 $2,500 $900
3) FMV after fire –0– –0– –0–
4) Decrease in FMV $500 $2,500 $900
5) Loss (smaller of (1) or  
(4))
$500 $2,500 $100
         
6) Total loss     $3,100

Real property.   In figuring a casualty loss on personal-use real property, treat the entire property (including any improvements, such as buildings, trees, and shrubs) as one item. Figure the loss using the smaller of the adjusted basis or the decrease in FMV of the entire property.

Example.

You bought your home a few years ago. You paid $160,000 ($20,000 for the land and $140,000 for the house). You also spent $2,000 for landscaping. This year a fire destroyed your home. The fire also damaged the shrubbery and trees in your yard. The fire was your only casualty or theft loss this year. Competent appraisers valued the property as a whole at $200,000 before the fire, but only $30,000 after the fire. (The loss to your household furnishings is not shown in this example. It would be figured separately on each item, as explained earlier under Personal property .) Shortly after the fire, the insurance company paid you $155,000 for the loss. You figure your casualty loss as follows:

1) Adjusted basis of the entire property (land, building, and landscaping) $162,000
2) FMV of entire property before fire $200,000
3) FMV of entire property after fire 30,000
4) Decrease in FMV of entire  
property
$170,000
5) Loss (smaller of (1) or (4)) $162,000
6) Subtract insurance 155,000
7) Amount of loss after reimbursement $7,000

Deduction Limits

After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. If the loss was to property for your personal use or your family's use, there are two limits on the amount you can deduct for your casualty or theft loss.

  1. You must reduce each casualty or theft loss by $100 ($100 rule).

  2. You must further reduce the total of all your casualty or theft losses by 10% of your adjusted gross income (10% rule).

You make these reductions on Form 4684.

These rules are explained next and Table 25-1 summarizes how to apply the $100 rule and the 10% rule in various situations. For more detailed explanations and examples, see Publication 547.

Table 25-1. How To Apply the Deduction Limits for Personal-Use Property

  $100 Rule 10% Rule
General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. Apply this rule after you have figured the amount of your loss. You must reduce your total casualty or theft loss by 10% of your adjusted gross income. Apply this rule after you reduce each loss by $100 (the $100 rule).
Single Event Apply this rule only once, even if many pieces of property are affected. Apply this rule only once, even if many pieces of property are affected.
More Than One Event Apply to the loss from each event. Apply to the total of all your losses from all events.
More Than One Person— 
With Loss From the Same Event 
(other than a married couple filing jointly)
Apply separately to each person. Apply separately to each person.
Married Couple—With Loss From the Same Event Filing Jointly Apply as if you were one person. Apply as if you were one person.
Filing Separately Apply separately to each spouse. Apply separately to each spouse.
More Than One Owner 
(other than a married couple filing jointly)
Apply separately to each owner of jointly owned property. Apply separately to each owner of jointly owned property.

Property used partly for business and partly for personal purposes.   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use part and for the business or income-producing part. You must figure each loss separately because the $100 rule and the 10% rule apply only to the loss on the personal-use part of the property.

$100 Rule

After you have figured your casualty or theft loss on personal-use property, you must reduce that loss by $100. This reduction applies to each total casualty or theft loss. It does not matter how many pieces of property are involved in an event. Only a single $100 reduction applies.

Example.

A hailstorm damages your home and your car. Determine the amount of loss, as discussed earlier, for each of these items. Since the losses are due to a single event, you combine the losses and reduce the combined amount by $100.

Single event.   Generally, events closely related in origin cause a single casualty. It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm.

10% Rule

You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Apply this rule after you reduce each loss by $100. For more information, see the Form 4684 instructions. If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion.

Example 1.

In June, you discovered that your house had been burglarized. Your loss after insurance reimbursement was $2,000. Your adjusted gross income for the year you discovered the theft is $29,500. You first apply the $100 rule and then the 10% rule. Figure your theft loss deduction as follows.

1) Loss after insurance $2,000
2) Subtract $100 100
3) Loss after $100 rule $1,900
4) Subtract 10% × $29,500 AGI 2,950
5) Theft loss deduction –0–

You do not have a theft loss deduction because your loss after you apply the $100 rule ($1,900) is less than 10% of your adjusted gross income ($2,950).

Example 2.

In March, you had a car accident that totally destroyed your car. You did not have collision insurance on your car, so you did not receive any insurance reimbursement. Your loss on the car was $1,800. In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items stored there. Your loss on the basement items after reimbursement was $2,100. Your adjusted gross income for the year that the accident and fire occurred is $25,000. You figure your casualty loss deduction as follows.

      Base-
    Car ment
1) Loss $1,800 $2,100
2) Subtract $100 per incident 100 100
3) Loss after $100 rule $1,700 $2,000
4) Total loss $3,700
5) Subtract 10% × $25,000 AGI 2,500
6) Casualty loss deduction $1,200

Gains and losses.   If you had both gains and losses from casualties or thefts to personal-use property, you must compare your total gains to your total losses. Do this after you have reduced each loss by any reimbursements and by $100, but before you have reduced the losses by 10% of your adjusted gross income.

Casualty or theft gains do not include gains you choose to postpone. See Publication 547 for information on the postponement of gain.

Losses more than gains.   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. The rest, if any, is your deductible loss from personal-use property.

Gains more than losses.   If your recognized gains are more than your losses, subtract your losses from your gains. The difference is treated as capital gain and must be reported on Schedule D (Form 1040). The 10% rule does not apply to your gains.

When To Report Gains and Losses

Gains.   If you receive an insurance or other reimbursement that is more than your adjusted basis in the destroyed or stolen property, you have a gain from the casualty or theft. You must include this gain in your income in the year you receive the reimbursement, unless you choose to postpone reporting the gain as explained in Publication 547.

If you have a loss, see Table 25-2 .

Table 25-2. When To Deduct a Loss

IF you have a loss... THEN deduct it in the year...
from a casualty, the loss occurred.
in a federally declared disaster area, the disaster occurred or the year immediately before the disaster.
from a theft, the theft was discovered.
on a deposit treated as a:  
• casualty or any ordinary loss, a reasonable estimate can be made.
• bad debt, deposits are totally worthless.

Losses.   Generally, you can deduct a casualty loss that is not reimbursable only in the tax year in which the casualty occurred. This is true even if you do not repair or replace the damaged property until a later year.

  You can deduct theft losses that are not reimbursable only in the year you discover your property was stolen.

  If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed.

Loss on deposits.   If your loss is a loss on deposits in an insolvent or bankrupt financial institution, see Loss on Deposits , earlier.

Disaster Area Loss

You generally must deduct a casualty loss in the year it occurred. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct the loss on your tax return or amended return for either of the following years.

  • The year the disaster occurred.

  • The year immediately preceding the year the disaster occurred.

Gains.    Special rules apply if you choose to postpone reporting gain on property damaged or destroyed in a federally declared disaster area. For those special rules, see Publication 547.

Postponed tax deadlines.   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared disaster. The tax deadlines the IRS may postpone include those for filing income and employment tax returns, paying income and employment taxes, and making contributions to a traditional IRA or Roth IRA.

  If any tax deadline is postponed, the IRS will publicize the postponement in your area by publishing a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB). Go to www.irs.gov/uac/Tax-Relief-in-Disaster-Situations to find out if a tax deadline has been postponed for your area.

Who is eligible.   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement.
  • Any individual whose main home is located in a covered disaster area (defined next).

  • Any business entity or sole proprietor whose principal place of business is located in a covered disaster area.

  • Any individual who is a relief worker affiliated with a recognized government or philanthropic organization who is assisting in a covered disaster area.

  • Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. The main home or principal place of business does not have to be located in the covered disaster area.

  • Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area.

  • The spouse on a joint return with a taxpayer who is eligible for postponements.

  • Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose records necessary to meet a postponed tax deadline are located in the covered disaster area.

  • Any individual visiting the covered disaster area who was killed or injured as a result of the disaster.

  • Any other person determined by the IRS to be affected by a federally declared disaster.

Covered disaster area.   This is an area of a federally declared disaster in which the IRS has decided to postpone tax deadlines for up to 1 year.

Abatement of interest and penalties.   The IRS may abate the interest and penalties on underpaid income tax for the length of any postponement of tax deadlines.

More information.   For more information, see Disaster Area Losses in Publication 547.

How To Report Gains and Losses

Use Form 4684 to report a gain or a deductible loss from a casualty or theft. If you have more than one casualty or theft, use a separate Form 4684 to determine your gain or loss for each event. Combine the gains and losses on one Form 4684. Follow the form instructions as to which lines to fill out. In addition, you must use the appropriate schedule to report a gain or loss. The schedule you use depends on whether you have a gain or loss.

If you have a: Report it on:
Gain Schedule D (Form 1040)
Loss Schedule A (Form 1040)

Adjustments to basis.   If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive, and by any deductible loss. Amounts you spend to restore your property after a casualty increase your adjusted basis. See Adjusted Basis in chapter 13 for more information.

Net operating loss (NOL).    If your casualty or theft loss deduction causes your deductions for the year to be more than your income for the year, you may have an NOL. You can use an NOL to lower your tax in an earlier year, allowing you to get a refund for tax you have already paid. Or, you can use it to lower your tax in a later year. You do not have to be in business to have an NOL from a casualty or theft loss. For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.


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