25. Nonbusiness Casualty and Theft Losses
Table of Contents
* What's New
* Introduction
* Useful Items - You may want to see:
* Casualty
o Progressive deterioration.
* Theft
* Loss on Deposits
* Proof of Loss
* Amount of Loss
o Adjusted Basis
o Decrease in Fair Market Value
o Insurance and Other Reimbursements
o Single Casualty on Multiple Properties
* Deduction Limits
o $100 Rule
o 10% Rule
* When To Report Gains and Losses
o Disaster Area Loss
* How To Report Gains and Losses
What's New
Katrina Emergency Tax Relief Act of 2005. . This Act provides tax relief
for persons affected by Hurricane Katrina. Under the Act, you may be able
to forgo the limits on personal casualty losses and extend the replacement
period for property in the Hurricane Katrina disaster area. You may also be
able to postpone certain tax deadlines. See Publication 4492.
Introduction
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 Schedule A (Form 1040), line 22. 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.
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.
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 13.
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.
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 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 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. 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 28.
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 Form 1040, line 21. 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 2003. You regained use
of your home in November 2004. The insurance payments you received in 2003
and 2004 were $1,500 more than the temporary increase in your living
expenses during those years. You include this amount in income on your 2004
Form 1040. If, in 2005, you receive further payments to cover the living
expenses you had in 2003 and 2004, you must include those payments in
income on your 2005 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.
Tip
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 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 a FMV of $2,000 when it was destroyed in a collision
with another car in 2004. The accident was due to the negligence of the
other driver. At the end of 2004, 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 2004.
In January 2005, 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 2005 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.
Caution
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 2005, 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 2005.
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 2006, 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.
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.
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.
Caution
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 25-2.
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 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.
Postponed tax deadlines. The IRS may postpone for up to 1 year certain
tax deadlines of taxpayers who are affected by a Presidentially 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).
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 relief worker affiliated with a recognized government or
philanthropic organization who is assisting in a covered disaster area.
*
Any individual, business entity, or sole proprietor whose records are
needed to meet a postponed 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 other person determined by the IRS to be affected by a
Presidentially declared disaster.
Covered disaster area. This is an area of a Presidentially declared
disaster area 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 deductible loss and any
insurance or other reimbursement. 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 is
more than your income, 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.
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 Presidentially 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, • a reasonable estimate can be made.
• bad debt, • deposits are totally worthless.
• ordinary loss, • a reasonable estimate can be made.
|
' |
about irs efile - about us - terms of use - privacy - contact us - irs tax code - state tax links - Tax Glossary
© 2008 RETURN-TAX.COM All Rights Reserved.
