Kansas and Midwestern disaster areas.(p65)
The following paragraphs explain the special rules that apply to casualties, thefts, and condemnations of taxpayers in both the Kansas disaster area (defined below) who were affected by storms and tornadoes that began on May 4, 2007, and the Midwestern disaster areas (defined later). For more information, see Publication 4492-A, Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes or Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.
Losses of personal use property that arose in these disaster areas are not subject to the $100 or 10% of adjusted gross income limitation. Qualifying losses include losses from casualties and thefts that arose in the disaster area and that were attributable to the storms and tornadoes. If you live in the Kansas disaster area and deducted your loss in 2007 or elected to deduct the loss in 2006, see Publication 4492-A for special instructions on how to complete your tax forms.
If you live in a Midwestern disaster area and you elect to deduct the loss in 2007, see Publication 4492-B for special instructions on how to complete your tax forms.
The replacement period for property in these disaster areas that was damaged, destroyed, stolen, or condemned has been extended from 2 to 5 years. For more information, see Replacement Period later.
The Kansas disaster area covers the Kansas counties of Barton, Clay, Cloud, Comanche, Dickinson, Edwards, Ellsworth, Kiowa, Leavenworth, Lyon, McPherson, Osage, Osborne, Ottawa, Phillips, Pottawatomie, Pratt, Reno, Rice, Riley, Saline, Shawnee, Smith, and Stafford.
For purposes of the special rules discussed earlier, the Midwestern disaster areas are areas for which a major disaster has been declared by the President after May 19, 2008, and before August 1, 2008, under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act because of severe storms, tornadoes, or flooding that occurred in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin. taxmap/pubs/p225-044.htm#en_us_publink100080928
Federally declared disasters.(p66)
New rules apply to losses of personal use property attributable to federally declared disasters declared in tax years beginning after 2007 and that occurred before 2010. A federally declared disaster is any disaster determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. A disaster area is the area determined to warrant such assistance. The new rules discussed here do not apply to losses in the Midwestern disaster areas.
The new rules are as follows.
- The net disaster loss (defined in (3) below) is not subject to the 10% of adjusted gross income limit.
- You can deduct a net disaster loss even if you do not itemize your deductions on Schedule A (Form 1040). You do this by completing Form 4684 and entering your net disaster loss on line 7 of the Standard Deduction Worksheet-Line 40 in the Form 1040 Instructions.
- Your net disaster loss is the excess of—
- Your personal casualty losses attributable to a federally declared disaster and occurring in a disaster area, over
- Your personal casualty gains.
Special rules for individuals impacted by Hurricanes Katrina, Rita, and Wilma.(p66)
If you claimed a casualty or theft loss deduction and in a later year you received more reimbursement than you expected, you do not recompute the tax for the year in which you claimed the deduction. Instead, you must include the reimbursement in your income for the year in which it was received, but only to the extent the original deduction reduced your tax for the earlier year. However,
an exception applies if you claimed a casualty or theft loss deduction for damage to or destruction of your main home caused by Hurricane Katrina, Rita, or Wilma, and in a later year you received a hurricane relief grant. Under this exception, you can choose to file an amended income tax return (Form 1040X) for the tax year in which you claimed the deduction and reduce (but not below zero) the amount of the deduction by the amount of the grant. If you make this choice, you must file Form 1040X by the later of:
- The due date for filing your tax return for the tax year in which you receive the grant, or
- July 30, 2009.
For more information, see IRS Notice 2008-95 at www.irs.gov
or Publication 547, Casualties, Disasters, and Thefts.
This chapter explains the tax treatment of casualties, thefts, and condemnations. A casualty occurs when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event. A theft occurs when property is stolen. A condemnation occurs when private property is legally taken for public use without the owner's consent. A casualty, theft, or condemnation may result in a deductible loss or taxable gain on your federal income tax return. You may have a deductible loss or a taxable gain even if only a portion of your property was affected by a casualty, theft, or condemnation.
An involuntary conversion occurs when you receive money or other property as reimbursement for a casualty, theft, condemnation, disposition of property under threat of condemnation, or certain other events discussed in this chapter.
If an involuntary conversion results in a gain and you buy qualified replacement property within the specified replacement period, you can postpone reporting the gain on your income tax return. For more information, see Postponing Gain, later. taxmap/pubs/p225-044.htm#TXMP57ca85b4
You may want to see:
Publication 523 Selling Your Home 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 547 Casualties, Disasters, and Thefts 584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) 584-B Business Casualty, Disaster, and Theft Loss Workbook Form (and Instructions) Sch A (Form 1040): Itemized
Deductions Sch D (Form 1040): Capital Gains and Losses Sch F (Form 1040): Profit or Loss From Farming 4684: Casualties and Thefts 4797: Sales of Business Property
See chapter 16 for information about getting publications and forms.taxmap/pubs/p225-044.htm#en_us_publink100080930
If your property is destroyed, damaged, or stolen, you may have a deductible loss. If the insurance or other reimbursement is more than the adjusted basis of the destroyed, damaged, or stolen property, you may have a taxable gain. taxmap/pubs/p225-044.htm#en_us_publink100080931
A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. taxmap/pubs/p225-044.htm#en_us_publink100080932
Deductible casualty losses can result from a number of different causes, including the following.
- Airplane crashes.
- Car, truck, or farm equipment accidents not resulting from your willful act or willful negligence.
- Fires (but see Nondeductible losses, next, for exceptions).
- 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.
- Storms, including hurricanes and tornadoes.
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 (explained below).
- A fire if you willfully set it, or pay someone else to set it.
- A car, truck, or farm equipment 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 below).
Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed above under Casualty are met.taxmap/pubs/p225-044.htm#en_us_publink100080935
The ornamental fruit trees in your yard were damaged when your horse stripped the bark from them. Some of the trees were completely girdled and died. Because the damage was not unexpected or unusual, the loss is not deductible.taxmap/pubs/p225-044.htm#en_us_publink100080936
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. Examples of damage due to progressive deterioration include damage from rust, corrosion, or termites. However, weather-related conditions or disease may cause another type of involuntary conversion. See Other Involuntary Conversions, later. taxmap/pubs/p225-044.htm#en_us_publink100080937
A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent.
Theft includes the taking of money or property by the following means.
- Kidnapping for ransom.
The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.
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. taxmap/pubs/p225-044.htm#en_us_publink100080939
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. taxmap/pubs/p225-044.htm#en_us_publink100080940
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. taxmap/pubs/p225-044.htm#en_us_publink100080941
You can deduct certain casualty or theft losses that occur in the business of farming. The following is a discussion of some losses you can deduct and some you cannot deduct. taxmap/pubs/p225-044.htm#en_us_publink100080942
Casualty or theft losses of livestock or produce bought for resale are deductible if you report your income on the cash method. If you report your income on an accrual method, take casualty and theft losses on property bought for resale by omitting the item from the closing inventory for the year of the loss. You cannot take a separate deduction. taxmap/pubs/p225-044.htm#en_us_publink100080943
Losses of livestock, plants, produce, and crops raised for sale are generally not deductible if you report your income on the cash method. You have already deducted the cost of raising these items as farm expenses.
For plants with a preproductive period of more than 2 years, you may have a deductible loss if you have a tax basis in the plants. You usually have a tax basis if you capitalized the expenses associated with these plants under the uniform capitalization rules. The uniform capitalization rules are discussed in chapter 6.
If you report your income on an accrual method, casualty or theft losses are deductible only if you included the items in your inventory at the beginning of your tax year. You get the deduction by omitting the item from your inventory at the close of your tax year. You cannot take a separate casualty or theft deduction. taxmap/pubs/p225-044.htm#en_us_publink100080944
A loss of future income is not deductible.taxmap/pubs/p225-044.htm#en_us_publink100080945
A severe flood destroyed your crops. Because you are a cash method taxpayer and already deducted the cost of raising the crops as farm expenses, this loss is not deductible, as explained above under Livestock, plants, produce, and crops raised for sale. You estimate that the crop loss will reduce your farm income by $25,000. This loss of future income is also not deductible.taxmap/pubs/p225-044.htm#en_us_publink100080946
If you sell timber downed as a result of a casualty, treat the proceeds from the sale as a reimbursement. If you use the proceeds to buy qualified replacement property, you can postpone reporting the gain. See Postponing Gain, later. taxmap/pubs/p225-044.htm#en_us_publink100080947
Casualty and theft losses of property used in your farm business usually result in deductible losses. If a fire or storm destroyed your barn, or you lose by casualty or theft an animal you bought for draft, breeding, dairy, or sport, you may have a deductible loss. See How To Figure a Loss, later. taxmap/pubs/p225-044.htm#en_us_publink100080948
Generally, losses of raised draft, breeding, dairy, or sporting animals do not result in deductible casualty or theft losses because you have no basis in the animals. However, you may have a basis in the animal and therefore may be able to claim a deduction if either of the following situations applies to you.
- You use inventories to determine your income and you included the animals in your inventory.
- You capitalized the expenses associated with the animals under the uniform capitalization rules and therefore have a tax basis in the animals subject to a casualty or theft.
When you include livestock in inventory, its last inventory value is its basis. When you lose an inventoried animal held for draft, breeding, dairy, or sport by casualty or theft during the year, decrease ending inventory by the amount you included in inventory for the animal. You cannot take a separate deduction.
How you figure a deductible casualty or theft loss depends on whether the loss was to farm or personal-use property and whether the property was stolen or partly or completely destroyed.taxmap/pubs/p225-044.htm#en_us_publink100080950
Farm property is the property you use in your farming business. If your farm property was completely destroyed or stolen, your loss is figured as follows:
| ||Your adjusted basis in the property|| |
| ||MINUS|| |
| ||Any salvage value|| |
| ||MINUS|| |
| ||Any insurance or other reimbursement you |
receive or expect to receive
You can use the schedules in Publication 584-B to list your stolen, damaged, or destroyed business property and to figure your loss.
If your farm property was partially damaged, use the steps shown under Personal-use property, next, to figure your casualty loss. However, the deduction limits, discussed later, do not apply. taxmap/pubs/p225-044.htm#en_us_publink100080952
Personal-use property is property used by you or your family members for personal use. You figure the casualty or theft loss on this property by taking 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 receive or expect to receive.
You must apply the deduction limits, discussed later, to determine your deductible loss.
You can use Publication 584 to list 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.
Adjusted basis is your basis (usually cost) increased or decreased by various events, such as improvements and casualty losses. For more information about adjusted basis, see chapter 6.taxmap/pubs/p225-044.htm#en_us_publink100080955
The decrease in FMV is the difference between the property's value immediately before the casualty or theft and its value immediately afterward. FMV is defined in chapter 10 under Payments Received or Considered Received. taxmap/pubs/p225-044.htm#en_us_publink100080956
To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. But other measures, such as the cost of cleaning up or making repairs (discussed next) can be used to establish decreases in FMV.
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. taxmap/pubs/p225-044.htm#en_us_publink100080957
The cost of cleaning up after a casualty is not part of a casualty loss. Neither is the cost of repairing damaged property after a casualty. But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions.
- The repairs are actually made.
- The repairs are necessary to bring the property back to its condition before the casualty.
- The amount spent for repairs is not excessive.
- The repairs fix 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.
The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, temporary housing, or a rental car, are not part of your casualty or theft loss. However, they may be deductible as farm business expenses if the damaged or stolen property is farm property. taxmap/pubs/p225-044.htm#en_us_publink100080959
Generally, if a single casualty or theft involves more than one item of property, you must figure your loss separately for each item of property. Then combine the losses to determine your total loss.
There is an exception to this rule for personal-use real property. See Exception for personal-use real property, later.
A fire on your farm damaged a tractor and the barn in which it was stored. The tractor had an adjusted basis of $3,300. Its FMV was $28,000 just before the fire and $10,000 immediately afterward. The barn had an adjusted basis of $28,000. Its FMV was $55,000 just before the fire and $25,000 immediately afterward. You received insurance reimbursements of $2,100 on the tractor and $26,000 on the barn. Figure your deductible casualty loss separately for the two items of property.
| || ||Tractor||Barn|
|2)||FMV before fire||$28,000||$55,000|
|3)||FMV after fire||10,000||25,000|
|4)||Decrease in FMV |
(line 2 − line 3)
|5)||Loss (lesser of line 1 or line 4)||$3,300||$28,000|
|7)||Deductible casualty loss||$1,200||$2,000|
|8)||Total deductible casualty loss||$3,200|taxmap/pubs/p225-044.htm#en_us_publink100080963
In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. Figure the loss using the smaller of the following.
- The decrease in FMV of the entire property.
- The adjusted basis of the entire property.
You bought a farm in 1960 for $20,000. The adjusted basis of the residential part is now $16,000. In 2008, a windstorm blew down shade trees and three ornamental trees planted at a cost of $600 on the residential part. The adjusted basis of the residential part includes the $600. The fair market value (FMV) of the residential part immediately before the storm was $130,000, and $126,000 immediately after the storm. The trees were not covered by insurance.
|2)||FMV before the storm||$130,000|
|3)||FMV after the storm|| 126,000|
|4)||Decrease in FMV (line 2 − line 3)||$4,000|
|5)||Loss before insurance|
(lesser of line 1 or line 4)
|7) ||Amount of loss||$4,000|
If you receive an insurance 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.
Do not subtract from your loss any insurance payments you receive for living expenses if you lose the use of your main home or are denied access to it because of a casualty. You may have to include a portion of these payments in your income. See Publication 547 for details.
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. Excludable cash gifts you receive also do not reduce your casualty loss if there are no limits on how you can use the money.
Generally, disaster relief grants received under the Robert T. Stafford Disaster Relief and Emergency Assistance Act are not included in your income. See Federal disaster relief grants, later, under Disaster Area Losses.
Qualified disaster relief payments for expenses you incurred as a result of a federally declared disaster are not taxable income to you. See Qualified disaster relief payments, later, under Disaster Area Losses.taxmap/pubs/p225-044.htm#en_us_publink100080967
If you figure your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement.taxmap/pubs/p225-044.htm#en_us_publink100080968
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. taxmap/pubs/p225-044.htm#en_us_publink100080969
If you later receive more reimbursement than you expected after you have 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 your original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. Do not refigure your tax for the year you claimed the deduction. See Recoveries in Publication 525 to find out how much extra reimbursement to include in income.
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. See Publication 547 for information on how to treat a gain from the reimbursement you receive because of a casualty or theft.
If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. taxmap/pubs/p225-044.htm#en_us_publink100080972
If you have a casualty or theft loss of several assets at the same time without an allocation of reimbursement to specific assets, divide the lump-sum reimbursement among the assets according to the fair market value of each asset at the time of the loss. Figure the gain or loss separately for each asset that has a separate basis. taxmap/pubs/p225-044.htm#en_us_publink100080973
If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. The result is your adjusted basis in the property. Amounts you spend on repairs to restore your property to its pre-casualty condition increase your adjusted basis. See Adjusted Basis in chapter 6 for more information. taxmap/pubs/p225-044.htm#en_us_publink100080974
The $100 and 10% rules (defined below) do not apply if your loss arose in the Kansas disaster area or the Midwestern disaster areas (defined at the beginning of this chapter under What's New). The 10% rule does not apply to federally declared disasters (also defined at the beginning of this chapter under What's New).
Casualty and theft losses of property held for personal use may be deductible if you itemize deductions on Schedule A (Form 1040).
There are two limits on the deduction for casualty or theft loss of personal-use property. You figure these limits on Form 4684.taxmap/pubs/p225-044.htm#en_us_publink100080976
You must reduce each casualty or theft loss on personal-use property by $100. This rule applies after you have subtracted any reimbursement. taxmap/pubs/p225-044.htm#en_us_publink100080977
You must further 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. Adjusted gross income is on line 38 of Form 1040. This rule does not apply to federally declared disasters.taxmap/pubs/p225-044.htm#en_us_publink100080978
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 burglary is $57,000. Figure your theft loss deduction as follows:
|1.||Loss after insurance||$2,000|
|3.||Loss after $100 rule||$1,900|
|4.||Subtract 10% × $57,000 AGI||$5,700|
|5.||Theft loss deduction||–0–|
You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($5,700).
If you have a casualty or theft gain in addition to a loss, you will have to make a special computation before you figure your 10% limit. See 10% Rule in Publication 547.
Generally, you can deduct casualty losses that are not reimbursable only in the tax year in which they occur. You generally can deduct theft losses that are not reimbursable only in the year you discover your property was stolen. However, losses in federally declared disaster areas are subject to different rules. See Disaster Area Losses, later, for an exception.
If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed. taxmap/pubs/p225-044.htm#en_us_publink100080981
If you lease property from someone else, you can deduct a loss on the property in the year your liability for the loss is fixed. This is true even if the loss occurred or the liability was paid in a different year. You are not entitled to a deduction until your liability under the lease can be determined with reasonable accuracy. Your liability can be determined when a claim for recovery is settled, adjudicated, or abandoned. taxmap/pubs/p225-044.htm#en_us_publink100080982
Robert leased a tractor from First Implement, Inc., for use in his farm business. The tractor was destroyed by a tornado in June 2008. The loss was not insured. First Implement billed Robert for the fair market value of the tractor on the date of the loss. Robert disagreed with the bill and refused to pay it. First Implement later filed suit in court against Robert. In 2009, Robert and First Implement agreed to settle the suit for $20,000, and the court entered a judgment in favor of First Implement. Robert paid $20,000 in June 2009. He can claim the $20,000 as a loss on his 2009 tax return.taxmap/pubs/p225-044.htm#en_us_publink100080983
If your deductions, including casualty or theft loss deductions, are more than your income for the year, you may have an NOL. An NOL can be carried back or carried forward and deducted from income in other years. See Publication 536 for more information on NOLs. taxmap/pubs/p225-044.htm#en_us_publink100080984
To deduct a casualty or theft loss, you must be able to prove that there was a casualty or theft. You must have records to support the amount you claim for the loss. taxmap/pubs/p225-044.htm#en_us_publink100080985
For a casualty loss, your records should show all the following information.
- 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.
For a theft loss, your records should show all the following information.
- When you discovered 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.
A casualty or theft may result in a taxable gain. If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. You generally report your gain as income in the year you receive the reimbursement. However, depending on the type of property you receive, you may not have to report your gain. See Postponing Gain, later.
Your gain is figured as follows:
- The amount you receive, minus
- Your adjusted basis in the property at the time of the casualty or theft.
Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. taxmap/pubs/p225-044.htm#en_us_publink100080988
The amount you receive includes any money plus the value of any property you receive, minus any expenses you have in obtaining reimbursement. It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. taxmap/pubs/p225-044.htm#en_us_publink100080989
A tornado severely damaged your barn. The adjusted basis of the barn was $25,000. Your insurance company reimbursed you $40,000 for the damaged barn. However, you had legal expenses of $2,000 to collect that insurance. Your insurance minus your expenses to collect the insurance is more than your adjusted basis in the barn, so you have a gain.
|3)||Amount received |
(line 1 − line 2)
| 5) ||Gain on casualty (line 3 − line 4)||$13,000|