When your loss involves several separate items, as would be the case if your home was destroyed by fire or flood, you are expected to calculate the loss for each item rather than come up with an overall estimate. What’s your casualty loss? The decline in fair market value-$200-caused by the fire. At the time of the fire, you could have sold the used chair for $200, but to replace it with a comparable new chair would cost you $1,000. Say that you bought a chair for $600 and that four years later it is destroyed by fire. Note that your loss doesn’t depend on the replacement value of the damaged property. If you are restoring landscaping after a storm, you can base your casualty loss on what you pay to remove or prune damaged trees and shrubs, and for the replanting necessary to restore your property to its pre-storm value. You may need appraisals to set the before-and-after values, although what you will have to pay for repairs-after an automobile accident, for example-can serve as evidence of your loss. The adjusted basis is usually your original cost plus the cost of any improvements you’ve made. The decrease in market value is the difference between what the property was worth before and after a casualty. The amount of your loss is generally the decrease in fair market value of the property, or your adjusted basis in the property, whichever is less. How about when Rover romps through the house, knocking down the cabinet that holds your 50-inch high-definition television? Again, the IRS says there’s no tax deduction to help pay for the damage. These include: earthquakes, lightning, hurricanes, tornadoes, floods, storms, volcanic eruptions, sonic booms, vandalism, riots, fires, car accidents and, oh yes, shipwrecks.īut what if you accidentally knock a vase off its pedestal and into a million pieces? The IRS says that’s not a casualty. To qualify for a tax deduction, the loss must result from damage caused by an identifiable event that is sudden, unexpected or unusual. The casualty loss deduction is the government’s way of helping taxpayers who have suffered financial losses due to accidents or storms. First, a review of the basic rules, then a look at the changes that make this part of the tax law more valuable than ever.
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