| Pub. 17, Your Federal Income Tax |
2005 Tax Year |
25.
Nonbusiness Casualty and Theft Losses
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.
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.
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How to figure the amount of your loss.
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How to treat insurance and other reimbursements you receive.
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The deduction limits.
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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.
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Schedule A (Form 1040), Itemized Deductions
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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
A casualty is the damage, destruction, or loss of property resulting from an identifiable event that
is sudden, unexpected, or unusual.
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A sudden event is one that is swift, not gradual or progressive.
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An unexpected event is one that is ordinarily unanticipated and unintended.
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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.
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Car accidents (but see Nondeductible losses, next, for exceptions).
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Earthquakes.
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Fires (but see Nondeductible losses, next, for exceptions).
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Floods.
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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.
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Mine cave-ins.
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Shipwrecks.
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Sonic booms.
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Storms, including hurricanes and tornadoes.
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Terrorist attacks.
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Vandalism.
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Volcanic eruptions.
Nondeductible losses.
A casualty loss is not deductible if the damage or destruction is caused by the following.
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Accidentally breaking articles such as glassware or china under normal conditions.
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A family pet.
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A fire if you willfully set it or pay someone else to set it.
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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.
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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.
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The steady weakening of a building due to normal wind and weather conditions.
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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.
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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.
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Termite or moth damage.
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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.
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.
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Blackmail.
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Burglary.
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Embezzlement.
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Extortion.
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Kidnapping for ransom.
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Larceny.
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Robbery.
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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.
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.
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:
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Casualty loss — report it on Form 4684 first and then on Schedule A (Form 1040).
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Ordinary loss — report it on Schedule A (Form 1040) as a miscellaneous itemized deduction.
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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.
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.
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The type of casualty (car accident, fire, storm, etc.) and when it occurred.
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That the loss was a direct result of the casualty.
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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.
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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.
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When you discovered that your property was missing.
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That your property was stolen.
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That you were the owner of the property.
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Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
Figure the amount of your loss using the following steps.
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Determine your adjusted basis in the property before the casualty or theft.
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Determine the decrease in fair market value of the property as a result of the casualty or theft.
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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 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.
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The appraiser's familiarity with your property before and after the casualty or theft.
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The appraiser's knowledge of sales of comparable property in the area.
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The appraiser's knowledge of conditions in the area of the casualty.
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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.
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The repairs are actually made.
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The repairs are necessary to bring the property back to its condition before the casualty.
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The amount spent for repairs is not excessive.
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The repairs take care of the damage only.
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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.
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Removing destroyed or damaged trees and shrubs minus any salvage you receive.
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Pruning and other measures taken to preserve damaged trees and shrubs.
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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.
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.
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.
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.
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.
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.
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:
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:
After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. If the loss was to
property for your
personal use or your family's use, there are two limits on the amount you can deduct for your casualty or theft loss.
-
You must reduce each casualty or theft loss by $100 ($100 rule).
-
You must further reduce the total of all your casualty or theft losses by 10% of your adjusted gross income (10% rule).
You make these reductions on Form 4684.
These rules are explained next and Table 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.
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.
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.
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.
Gains and losses.
If you had both gains and losses from casualties or thefts to personal-use property, you must compare your total gains
to your total losses. Do
this after you have reduced each loss by any reimbursements and by $100.
Casualty or theft gains do not include gains you choose to postpone. See Publication 547 for information on the postponement
of gain.
Losses more than gains.
If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by
10% of your adjusted gross
income. The rest, if any, is your deductible loss.
Gains more than losses.
If your recognized gains are more than your losses, subtract your losses from your gains. The difference is treated
as capital gain and must be
reported on Schedule D (Form 1040). The 10% rule does not apply to your gains.
When To Report Gains and Losses
If you receive an insurance or other reimbursement that is more than your adjusted basis in the destroyed or stolen property,
you have a gain from
the casualty or theft. You must include this gain in your income in the year you receive the reimbursement, unless you choose
to postpone reporting
the gain as explained in Publication 547.
If you have a loss, see Table 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.
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.
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.
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.
|
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