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.
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. Figure your theft loss as follows.
| 1. |
Loss after insurance |
$2,000 |
| 2. |
Subtract $100 |
100 |
| 3. |
Loss after $100 rule |
$1,900 |
| 4. |
Subtract 10% of $29,500 AGI |
$2,950 |
| 5. |
Theft loss deduction |
-0- |
You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950).
More than one loss.
If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. Then you must reduce the
total of all your losses by 10% of your adjusted gross income.
Example.
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 you had 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.
| |
|
Car |
Basement |
| 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% of $25,000 AGI |
2,500 |
| 6. |
Casualty loss deduction |
$200 |
Married taxpayers.
If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. It does not matter if you own the property
jointly or separately.
If you file separate returns, the 10% rule applies to each return on which a loss is claimed.
More than one owner.
If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies
separately to each.
Gains and losses.
If you have casualty or theft gains as well as losses 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 Postponement of Gain, later.
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.
Example.
Your theft loss after reducing it by reimbursements and by $100 is $2,700. Your casualty gain is $700. Your loss is more than your gain, so you
must reduce your $2,000 net loss ($2,700 - $700) by 10% of your adjusted gross income.
Gains more than losses.
If your recognized gains are more than your losses, subtract your losses from your gains. The difference is treated as a capital gain and must be
reported on Schedule D (Form 1040). The 10% rule does not apply to your gains.
Example.
Your theft loss is $600 after reducing it by reimbursements and by $100. Your casualty gain is $1,600. Because your gain is more than your loss,
you must report the $1,000 net capital gain ($1,600 - $600) on Schedule D.
More information.
For information on how to figure recognized gains, see Figuring a Gain, later.
Figuring the Deduction
Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. However, a special rule applies to real property you
own for personal use.
Real property.
In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the
improvements) are considered together.
Example 1.
In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. (Your land was not
damaged.) This was your only casualty or theft loss for the year. The FMV of the property immediately before the fire was $180,000 ($145,000 for the
cottage and $35,000 for the land). The FMV immediately after the fire was $35,000 (value of the land). You collected $130,000 from the insurance
company. Your adjusted gross income for the year the fire occurred is $80,000. Your deduction for the casualty loss is $6,700, figured in the
following manner.
| 1. |
Adjusted basis of the entire property (cost in this example) |
$144,800 |
| 2. |
FMV of entire property before fire |
$180,000 |
| 3. |
FMV of entire property after fire |
35,000 |
| 4. |
Decrease in FMV of entire property (line 2 - line 3) |
$145,000 |
| 5. |
Loss (smaller of line 1 or line 4) |
$144,800 |
| 6. |
Subtract insurance |
130,000 |
| 7. |
Loss after reimbursement |
$14,800 |
| 8. |
Subtract $100 |
100 |
| 9. |
Loss after $100 rule |
$14,700 |
| 10. |
Subtract 10% of $80,000 AGI |
8,000 |
| 11. |
Casualty loss deduction |
$6,700 |
Example 2.
You bought your home a few years ago. You paid $150,000 ($10,000 for the land and $140,000 for the house). You also spent an additional $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 $175,000 before the fire, but only $50,000 after the fire. Shortly after
the fire, the insurance company paid you $95,000 for the loss. Your adjusted gross income for this year is $70,000. You figure your casualty loss
deduction as follows.
| 1. |
Adjusted basis of the entire property (cost of land, building, and landscaping) |
$152,000 |
| 2. |
FMV of entire property before fire |
$175,000 |
| 3. |
FMV of entire property after fire |
50,000 |
| 4. |
Decrease in FMV of entire property (line 2 - line 3) |
$125,000 |
| 5. |
Loss (smaller of line 1 or line 4) |
$125,000 |
| 6. |
Subtract insurance |
95,000 |
| 7. |
Loss after reimbursement |
$30,000 |
| 8. |
Subtract $100 |
100 |
| 9. |
Loss after $100 rule |
$29,900 |
| 10. |
Subtract 10% of $70,000 AGI |
7,000 |
| 11. |
Casualty loss deduction |
$22,900 |
Personal property.
Personal property is generally 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. Reduce the
total loss by $100 and 10% of your adjusted gross income to figure the loss deduction.
Example 1.
In August, a storm destroyed your pleasure boat, which cost $18,500. This was your only casualty or theft loss for the year. Its FMV immediately
before the storm was $17,000. You had no insurance, but were able to salvage the motor of the boat and sell it for $200. Your adjusted gross income
for the year the casualty occurred is $70,000.
Although the motor was sold separately, it is part of the boat and not a separate item of property. You figure your casualty loss deduction as
follows.
| 1. |
Adjusted basis (cost in this example) |
$18,500 |
| 2. |
FMV before storm |
$17,000 |
| 3. |
FMV after storm |
200 |
| 4. |
Decrease in FMV (line 2 - line 3) |
$16,800 |
| 5. |
Loss (smaller of line 1 or line 4) |
$16,800 |
| 6. |
Subtract insurance |
-0- |
| 7. |
Loss after reimbursement |
$16,800 |
| 8. |
Subtract $100 |
100 |
| 9. |
Loss after $100 rule |
$16,700 |
| 10. |
Subtract 10% of $70,000 AGI |
7,000 |
| 11. |
Casualty loss deduction |
$9,700 |
Example 2.
In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. You had bought the car for
$30,000. The FMV of the car just before the accident was $17,500. Its FMV just after the accident was $180 (scrap value). Your insurance company
reimbursed you $16,000.
Your watch was not insured. You had purchased it for $250. Its FMV just before the accident was $500. Your adjusted gross income for the year the
accident occurred is $97,000. Your casualty loss deduction is zero, figured as follows.
| |
|
Car |
Watch |
| 1. |
Adjusted basis (cost) |
$30,000 |
$250 |
| 2. |
FMV before accident |
$17,500 |
$500 |
| 3. |
FMV after accident |
180 |
-0- |
| 4. |
Decrease in FMV (line 2 - line 3) |
$17,320 |
$500 |
| 5. |
Loss (smaller of line 1 or line 4) |
$17,320 |
$250 |
| 6. |
Subtract insurance |
16,000 |
-0- |
| 7. |
Loss after reimbursement |
$1,320 |
$250 |
| 8. |
Total loss |
$1,570 |
| 9. |
Subtract $100 |
100 |
| 10. |
Loss after $100 rule |
$1,470 |
| 11. |
Subtract 10% of $97,000 AGI |
9,700 |
| 12. |
Casualty loss deduction |
-0- |
Both real and personal properties.
When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. However, you apply a
single $100 reduction to the total loss. Then, you apply the 10% rule to figure the casualty loss deduction.
Example.
In July, a hurricane damaged your home, which cost you $164,000 including land. The FMV of the property (both building and land) immediately before
the storm was $170,000 and its FMV immediately after the storm was $100,000. Your household furnishings were also damaged. You separately figured the
loss on each damaged household item and arrived at a total loss of $600.
You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. Your adjusted gross
income for the year the hurricane occurred is $65,000. You figure your casualty loss deduction from the hurricane in the following manner.
| 1. |
Adjusted basis of real property (cost in this example) |
$164,000 |
| 2. |
FMV of real property before hurricane |
$170,000 |
| 3. |
FMV of real property after hurricane |
100,000 |
| 4. |
Decrease in FMV of real property (line 2 - line 3) |
$70,000 |
| 5. |
Loss on real property (smaller of line 1 or line 4) |
$70,000 |
| 6. |
Subtract insurance |
50,000 |
| 7. |
Loss on real property after reimbursement |
$20,000 |
| 8. |
Loss on furnishings |
$600 |
| 9. |
Subtract insurance |
-0- |
| 10. |
Loss on furnishings after reimbursement |
$600 |
| 11. |
Total loss (line 7 plus line 10) |
$20,600 |
| 12. |
Subtract $100 |
100 |
| 13. |
Loss after $100 rule |
$20,500 |
| 14. |
Subtract 10% of $65,000 AGI |
6,500 |
| 15. |
Casualty loss deduction |
$14,000 |
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 portion and for the business or income-producing portion. You must figure each loss separately because the
losses attributed to these two uses are figured in two different ways. When figuring each loss, allocate the total cost or basis, the FMV before and
after the casualty or theft loss, and the insurance or other reimbursement based on the use of the property. The $100 rule and the 10% rule apply only
to the casualty or theft loss on the personal-use portion of the property.
Example.
You own a building that you constructed on leased land. You use half of the building for your business and you live in the other half. The cost of
the building was $400,000. You made no further improvements or additions to it.
A flood in March damaged the entire building. The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. Your
insurance company reimbursed you $40,000 for the flood damage. Depreciation on the business part of the building before the flood totaled $24,000.
Your adjusted gross income for the year the flood occurred is $125,000.
You have a deductible business casualty loss of $10,000. You do not have a deductible personal casualty loss because of the 10% rule. You figure
your loss as follows.
| |
|
Business |
|
Personal |
| |
|
Part |
|
Part |
| 1. |
Cost (total $400,000) |
$200,000 |
|
$200,000 |
| 2. |
Subtract depreciation |
24,000 |
|
-0- |
| 3. |
Adjusted basis |
$176,000 |
|
$200,000 |
| 4. |
FMV before flood (total $380,000) |
$190,000 |
|
$190,000 |
| 5. |
FMV after flood (total $320,000) |
160,000 |
|
160,000 |
| 6. |
Decrease in FMV (line 4 - line 5) |
$30,000 |
|
$30,000 |
| 7. |
Loss (smaller of line 3 or line 6) |
$30,000 |
|
$30,000 |
| 8. |
Subtract insurance |
20,000 |
|
20,000 |
| 9. |
Loss after reimbursement |
$10,000 |
|
$10,000 |
| 10. |
Subtract $100 on personal-use property |
-0- |
|
100 |
| 11. |
Loss after $100 rule |
$10,000 |
|
$9,900 |
| 12. |
Subtract 10% of $125,000 AGI on personal-use property |
-0- |
|
12,500 |
| 13. |
Deductible business loss |
$10,000 |
|
|
| 14. |
Deductible personal loss |
|
|
-0- |
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