This chapter explains the tax
treatment of personal (not
business 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 both 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.
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.
Other
sources of information.
For information on a
casualty or theft loss of
business or income-producing
property, see Publication
547.
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.
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 next).
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.
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.
Theft includes the taking of
money or property by the
following means.
Blackmail.
Burglary.
Embezzlement.
Extortion.
Kidnapping for
ransom.
Larceny.
Robbery.
Threats.
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.
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 approval
of the Internal Revenue
Service.
If you claim an ordinary
loss, report it as a
miscellaneous itemized
deduction on line 22 of
Schedule A (Form 1040). 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
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.
Proof of Loss
To deduct a casualty or theft
loss, you must be able to prove
that you had a casualty or
theft. You must be able to
support the amount you claim for
the loss as discussed next.
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.
Amount of Loss
Figure the amount of your
loss using the following steps.
Determine your
adjusted basis in the
property before the
casualty or theft.
Determine the
decrease in fair market
value of the property as
a result of the casualty
or theft.
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.
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.
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 14.
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 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.
Recovered stolen
property.
Recovered stolen
property is your
property that was stolen
and later returned to
you. If you recover
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
earlier) 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 13.
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. But
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.
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 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 modify
the book's retail
value 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
The following items
are generally not
considered when
establishing the
decrease in the FMV of
your property.
Replacement cost.
The cost of
replacing stolen or
destroyed property
is not part of a
casualty or theft
loss.
Cost of protection.
The cost of
protecting your
property against a
casualty or theft is
not part of a
casualty or theft
loss. For example,
you cannot deduct
the amount you spend
on insurance or to
board up your house
against a storm.
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.
Related 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.
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 only
on its FMV.
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 30.
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 $500
deductible. Because
your insurance did
not cover the first
$500 of an auto
collision, the $500
would be deductible
(subject to the
deduction limits
discussed later).
This is true even if
you do not file an
insurance claim,
since your insurance
policy would never
have reimbursed you
for the deductible.
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.
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 which 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 line 21 of
Form 1040. However,
if the casualty
occurs in a
Presidentially
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 2002. You
regained use of
your home in
November 2003.
The insurance
payments you
received in 2002
and 2003 were
$1,500 more than
the temporary
increase in your
living expenses
during those
years. You
include this
amount in income
on your 2003
Form 1040. If,
in 2004, you
receive further
payments to
cover the living
expenses you had
in 2002 and
2003, you must
include those
payments in
income on your
2004 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. These
items are not
taxable income to
you.
Qualified
disaster relief payments
you receive for expenses
you incurred as a result
of a Presidentially
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 received
under the Disaster
Relief and Emergency
Assistance Act 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 a FMV of
$2,000 when it
was destroyed in
a collision with
another car in
2003. The
accident was due
to the
negligence of
the other
driver. At the
end of 2003,
there was a
reasonable
prospect that
the owner of the
other car would
reimburse you in
full. You
subtracted the
expected
reimbursement
when you figured
your loss. You
did not have a
deductible loss
in 2003.
In January
2004, 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 2004
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
13.
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 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, you do not
have any amount to
include in your
income or any loss
to deduct.
Example.
In December
2004, 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
2004.
Due to the
$100 rule
(discussed later
under
Deduction
Limits),
you cannot
deduct the $100
deductible you
paid. When you
receive the $850
from the
insurance
company in 2005,
do not report it
as income.
Single
Casualty on
Multiple
Properties
Personal property.
If a single casualty
or theft involves more
than one item of
personal property, you
must figure the loss on
each item separately.
Then combine the losses
to determine your total
loss from that casualty
or theft. Personal
property is any property
that is not real
property.
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 a FMV of $500
just before the
fire. The rug cost
$3,000 and had a 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.
You must reduce each
casualty or theft loss
by $100 ($100 rule).
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 27-1
summarizes how to apply the $100
rule and the 10% rule in various
situations. For more detailed
explanations and examples, see
Publication 547.
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. 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 $1,200.
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
$1,700. 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
$1,200
$1,700
2)
Subtract
$100 per
incident
100
100
3)
Loss after
$100 rule
$1,100
$1,600
4)
Total loss
$2,700
5)
Subtract 10%
ื $25,000
AGI
2,500
6)
Casualty
loss
deduction
$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.
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.
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
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
27-2.
Loss on
deposits.
If your loss is a loss on
deposits in an insolvent or
bankrupt financial
institution, see
Loss on Deposits, earlier.
Casualty
loss.
Generally, you can deduct
a casualty loss 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.
Theft loss.
You generally can deduct a
theft loss only in the year
you discover your property
was stolen. You must be able
to show that there was a
theft, but you do not have
to know when the theft
occurred. However, you
should show when you
discovered that your
property was missing.
Disaster
Area Loss
If you have a casualty
loss from a disaster that
occurred in a Presidentially
declared disaster area, 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.
Table 27-1. 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
CoupleWith
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.
Table 27-2. When To
Deduct a Loss
IF you
have a
loss...
THEN
deduct it in
the year...
from a
casualty,
the loss
occurred.
in a
Presidentially
declared
disaster
area,
the disaster
occurred or
the year
immediately
before the
disaster.
