Nonbusiness Casualty and Theft Losses
Important Change
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 Loss.
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 more of the following forms.
- Schedule A (Form 1040), Itemized Deductions
- Schedule D (Form 1040), Capital Gains and Losses
Condemnations.
For information on condemnations of property, see Involuntary Conversions in chapter 1 of Publication 544.
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. But 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. But, 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.
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.
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 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.
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. 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).
- 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.
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 the fire |
$1,600 |
|
| 3) |
Normal living expenses |
725 |
|
| 4) |
Temporary increase in living ex- penses: 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 2000. You regained use of your home in November 2001. The insurance payments you received in
2000 and 2001 were $1,500 more than the temporary increase in your living expenses during those years. You include this amount in income on your 2001
Form 1040. If, in 2002, you receive further payments to cover the living expenses you had in 2000 and 2001, you must include those payments in income
on your 2002 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 in tax years ending after September 10, 2001, for expenses you incurred as a result of a
Presidentially declared disaster, are not taxable income to you. For information on qualified disaster relief payments, see Disaster Area
Losses in Publication 547.
Reimbursement Received After Deducting Loss
If you figured your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you
receive your actual reimbursement. This section explains the adjustment you may have to make.
Actual reimbursement less than expected.
If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the
year in which you can reasonably expect no more reimbursement.
Example.
Your personal car had an FMV of $2,000 when it was destroyed in a collision with another car last year. The accident was due to the negligence of
the other driver. At the end of the year, 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 last year.
This January, 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 this year 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.
Last December, 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 last year.
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 this year, do not report it as income.
