Table of Contents
This chapter explains the tax treatment of personal (not business or investment 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.
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Schedule A (Form 1040), Itemized Deductions
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Schedule D (Form 1040), Capital Gains and Losses
Publication
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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)
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Schedule A (Form 1040) Itemized Deductions
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Schedule D (Form 1040) Capital Gains and Losses
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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.
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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.
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Accidentally breaking articles such as glassware or china under normal conditions.
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A family pet (explained below).
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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 later).
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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. You do not need to show a conviction for theft.
Theft includes the taking of money or property by the following means.
The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.
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Revenue Ruling 2009-9, 2009-14 I.R.B. 735 (available at www.irs.gov/irb/2009-14_IRB/ar07.html).
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Revenue Procedure 2009-20, 2009-14 I.R.B. 749 (available at www.irs.gov/irb/2009-14_IRB/ar11.html).
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.
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As a casualty loss.
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As an ordinary loss.
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As a nonbusiness bad debt.
To deduct a casualty or theft loss, you must be able to prove that you had a casualty or theft. You also must be able to support the amount you take as a deduction.
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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.
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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.
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.
To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. However, other measures can also be used to establish certain decreases.
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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.
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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.
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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.
You generally should not consider the following items when attempting to establish the decrease in FMV of your property.
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.
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.
Example.
You have a car insurance policy with a $1000 deductible. Because your insurance did not cover the first $1000 of an auto collision, the $1000 would be deductible (subject to the deduction limits discussed later). This is true even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible.
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.
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.
Example.
Your home was damaged by a hurricane. Relatives and neighbors made cash gifts to you that 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.
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You lose the use of your main home because of a casualty.
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Government authorities do not allow you access to your main home because of a casualty or threat of one.
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Rent for suitable housing.
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Transportation.
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Food.
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Utilities.
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Miscellaneous services.
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 fire | 1,600 | |
| 3) | Normal living expenses | 725 | |
| 4) | Temporary increase in living expenses: Subtract line 3 from line 2 |
875 | |
| 5) | Amount of payment includible in income: Subtract line 4 from line 1 |
$ 225 | |
Example.
Your main home was destroyed by a tornado in August 2009. You regained use of your home in November 2010. The insurance payments you received in 2009 and 2010 were $1,500 more than the temporary increase in your living expenses during those years. You include this amount in income on your 2010 Form 1040. If, in 2011, you receive further payments to cover the living expenses you had in 2009 and 2010, you must include those payments in income on your 2011 Form 1040.
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.
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.
Example.
Your personal car had an FMV of $2,000 when it was destroyed in a collision with another car in 2010. The accident was due to the negligence of the other driver. At the end of 2010, there was a reasonable prospect that the owner of the other car would reimburse you in full. You did not have a deductible loss in 2010.
In January 2011, 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 2011 subject to the limits discussed later.
Example.
In December 2011, 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 2011.
Due to the $100 rule (discussed later under Deduction Limits ), you cannot deduct the $100 you paid as the deductible. When you receive the $850 from the insurance company in 2012, do not report it as income.
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 an FMV of $500 just before the fire. The rug cost $3,000 and had an 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:
| Chair | Rug | Table | ||
| 1) | Basis (cost) | $750 | $3,000 | $100 |
| 2) | FMV before fire | $500 | $2,500 | $900 |
| 3) | FMV after fire | –0– | –0– | –0– |
| 4) | Decrease in FMV | $500 | $2,500 | $900 |
| 5) | Loss (smaller of (1) or (4)) |
$500 | $2,500 | $100 |
| 6) | Total loss | $3,100 |
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:
| 1) | Adjusted basis of the entire property (land, building, and landscaping) | $162,000 |
| 2) | FMV of entire property before fire | $200,000 |
| 3) | FMV of entire property after fire | 30,000 |
| 4) | Decrease in FMV of entire property |
$170,000 |
| 5) | Loss (smaller of (1) or (4)) | $162,000 |
| 6) | Subtract insurance | 155,000 |
| 7) | Amount of loss after reimbursement | $7,000 |
| $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. | |
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.
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You must reduce each casualty or theft loss by $100 ($100 rule).
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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.
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.
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. For more information, see the Form 4684 instructions. 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.
| 1) | Loss after insurance | $2,000 |
| 2) | Subtract $100 | 100 |
| 3) | Loss after $100 rule | $1,900 |
| 4) | Subtract 10% × $29,500 AGI | 2,950 |
| 5) | Theft loss deduction | –0– |
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 $1,800. 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 $2,100. Your adjusted gross income for the year that the accident and fire occurred is $25,000. You figure your casualty loss deduction as follows.
| Base- | |||
| Car | ment | ||
| 1) | Loss | $1,800 | $2,100 |
| 2) | Subtract $100 per incident | 100 | 100 |
| 3) | Loss after $100 rule | $1,700 | $2,000 |
| 4) | Total loss | $3,700 | |
| 5) | Subtract 10% × $25,000 AGI | 2,500 | |
| 6) | Casualty loss deduction | $1,200 | |
If you have a loss, see Table 25-2 .
| IF you have a loss... | THEN deduct it in the year... |
| from a casualty, | the loss occurred. |
| in a federally 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. |
You generally must deduct a casualty loss in the year it occurred. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct the loss on your tax return or amended return for either of the following years.
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The year the disaster occurred.
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The year immediately preceding the year the disaster occurred.
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Any individual whose main home is located in a covered disaster area (defined next).
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Any business entity or sole proprietor whose principal place of business is located in a covered disaster area.
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Any individual who is a relief worker affiliated with a recognized government or philanthropic organization who is assisting in a covered disaster area.
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Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax 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.
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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.
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The spouse on a joint return with a taxpayer who is eligible for postponements.
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Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose records necessary to meet a postponed tax deadline are located in the covered disaster area.
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Any individual visiting the covered disaster area who was killed or injured as a result of the disaster.
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Any other person determined by the IRS to be affected by a federally declared disaster.
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.