Important Changes
Postponed tax deadlines in disaster areas.
The maximum period of time for which the IRS may postpone certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster
is increased from 120 days to 1 year. 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. For more information, see Postponed Tax Deadlines, later,
under Disaster Area Losses.
Replacement period.
The replacement period for property in the New York Liberty Zone that was damaged or destroyed as a result of the terrorist attacks on September
11, 2001, is increased from 2 to 5 years. For more information, see Property in the New York Liberty Zone, later, under Replacement
Period.
Qualified disaster relief payments.
Qualified disaster relief payments received in tax years ending after September 10, 2001, by an individual for certain expenses incurred because of
a Presidentially declared disaster are not included in income. For more information, see Qualified disaster relief payments, later, under
Disaster Area Losses.
Important Reminder
Photographs of missing children.
The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children
selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
Introduction
This publication explains the tax treatment of casualties, thefts, and losses on deposits. A casualty
occurs when your property is damaged as a result of a disaster such as a storm, fire, car accident, or similar
event. A theft
occurs when someone steals your property. A
loss on deposits occurs when your financial institution becomes insolvent or bankrupt.
This publication discusses the following topics.
- Definitions of a casualty, theft, and loss on deposits.
- How to figure the amount of your gain or loss.
- How to treat insurance and other reimbursements you receive.
- The deduction limits.
- When and how to report a casualty or theft.
- The special rules for disaster area losses.
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).
- Schedule D (Form 1040).
- Form 4797.
For details on which form to use, see How To Report Gains and Losses, later.
Condemnations.
For information on condemnations of property, see Involuntary Conversions in chapter 1 of Publication 544.
Workbooks 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 and its contents, and your motor vehicles.
Publication 584B is available to help you make a list of your stolen or damaged business or income-producing property and figure your loss.
Comments and suggestions.
We welcome your comments about this publication and your suggestions for future editions.
You can e-mail us while visiting our web site at www.irs.gov.
You can write to us at the following address:
Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224
We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in
your correspondence.
Useful Items You may want to see:
Publication
- 523
Selling Your Home
- 525
Taxable and Nontaxable Income
- 550
Investment Income and Expenses
- 551
Basis of Assets
- 584
Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)
- 584B
Business Casualty, Disaster, and
Theft Loss Workbook
Form (and Instructions)
- Schedule A (Form 1040)
Itemized Deductions
- Schedule D (Form 1040)
Capital Gains and Losses
- 4684
Casualties and Thefts
- 4797
Sales of Business Property
See How To Get Tax Help near the end of this publication for information about getting publications and forms.
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, later.
- 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 law 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.
The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.
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 were 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.
The loss you can deduct as an ordinary loss is limited to $20,000 ($10,000 if you are married filing separately) and applies only if the financial
institution is not federally insured.
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 generally is 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 the choice,
you cannot change it without permission from the Internal Revenue Service.
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 actual loss is determined before you can
deduct the loss as a nonbusiness bad debt.
How to report.
The kind of deduction you choose for your loss on deposits determines how you report your loss. See Table 1.
More information.
For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the instructions
for Form 4684.
Deducted loss recovered.
If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of
recovery. If any part of the original deduction did not reduce your tax in the earlier year, you do not have to include that part of the recovery in
your income. For more information, see Recoveries in Publication 525.
Proof of Loss
To deduct a casualty or theft loss, you must be able to show that there was 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, you should be able to 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, you should be able to 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 your deduction.
Figuring a Loss
To determine your deduction for a casualty or theft loss, you must first figure your loss.
Table 1. Reporting Loss on Deposits
IF you choose to report the loss as a(n)... |
|
THEN report it on... |
Casualty loss |
|
Form 4684 and Schedule A (Form 1040). |
Ordinary loss |
|
Schedule A (Form 1040). |
Nonbusiness bad debt |
|
Schedule D (Form 1040). |
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 (FMV) 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.
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 more 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
Figuring a Gain, later.
Business or income-producing property.
If you have business or income-producing property, such as rental property, and it is
stolen or completely destroyed, the decrease in FMV is not considered. Your loss is figured as follows:
|
Your adjusted basis in the property |
|
|
MINUS |
|
|
Any salvage value |
|
|
MINUS |
|
|
Any insurance or other reimbursement you receive or expect to receive |
|
Loss of inventory.
There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers.
One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. Do not
claim this loss again as a casualty or theft loss. If you take the loss through the increase in the cost of goods sold, include any insurance or other
reimbursement you receive for the loss in gross income.
The other way is to deduct the loss separately. If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by
making a downward adjustment to opening inventory or purchases. Reduce the loss by the reimbursement you received. Do not include the reimbursement in
gross income. If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of
recovery.
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.
Separate computations.
Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. Then combine
the losses to determine the total loss from that casualty or theft.
Exception for personal-use real property.
In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs)
is treated as one item. Figure the loss using the smaller of the following.
- The decrease in FMV of the entire property.
- The adjusted basis of the entire property.
See Real property under Figuring the Deduction, later.
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
Publication 525.
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 also can be used to
establish certain decreases. See Appraisal and Cost of cleaning up or making repairs, next.
Appraisal.
An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards 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 Presidentially declared
disaster to establish the amount of your disaster loss. For more information on disasters, see Disaster Area Losses, later.
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 of 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 books' retail
values and modify them by factors such as the mileage and 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 Decreases 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 the property is business property, these expenses are deductible as business
expenses.
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.
The incidental expenses 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. However, they may be deductible as business expenses if the damaged or stolen property is business
property.
Replacement cost.
The cost of replacing stolen or destroyed property is not part of a casualty or theft loss.
Example.
You bought a new chair 4 years ago for $300. In April, a fire destroyed the chair. You estimate that it would cost $500 to replace it. If you had
sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. The chair was not insured. Your
loss is $100, the FMV of the chair before the fire. It is not $500, the replacement cost.
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, later.
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. They are expenses in determining your tax liability. You can claim these costs as a miscellaneous itemized deduction subject to the
2%-of-adjusted-gross-income limit on Schedule A (Form 1040).
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