Publication 225
taxmap/pubs/p225-044.htm#en_us_publink1000218580taxmap/pubs/p225-044.htm#en_us_publink1000218585Decrease in personal casualty and theft loss limit.(p65)
Each personal casualty or theft loss is limited to the excess
of the loss over $100 (instead of $500). In addition, the
10%-of-adjusted-gross-income (10%-of-AGI) limit continues to apply to the net
loss.
taxmap/pubs/p225-044.htm#en_us_publink1000218586Disaster losses.(p65)
The special rules that were in effect in 2008 and 2009 for losses
of personal-use property attributable to federally declared disasters do not
apply to losses occurring in 2010 and later years. Instead, these losses are
subject to the 10%-of-AGI limit and are deductible only if you itemize your
deductions. These losses continue to be subject to the $100-per-loss limit.
 | At the time this publication went to print, Congress was
considering legislation that would do the following.
- Increase the personal casualty and theft loss limit to
the excess of the loss over $500 (instead of $100).
- In the case of federally declared disaster area losses
occurring in 2010, the net disaster loss would be exempt from the 10%-of-AGI
limit and be deductible even if you do not itemize your deductions.
To find out whether the legislation has been enacted, go
to IRS.gov. |
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.
Useful items
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 Sch L (Form 1040A or 1040):
Standard Deduction for Certain Filers 4684:
Casualties and Thefts 4797:
Sales of Business Property See
chapter 16 for information about getting publications and forms.
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_publink1000218588A 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_publink1000218589Deductible 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.
- Earthquakes.
- Fires (but see
Nondeductible losses next for exceptions).
- Floods.
- Freezing.
- 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.
- Lightning.
- 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.
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_publink1000218593Loss 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.
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. You do not need to show a conviction for theft.
Theft includes the taking of money or property by the following
means.
- Blackmail.
- Burglary.
- Embezzlement.
- Extortion.
- Kidnapping for ransom.
- Larceny.
- Robbery.
- Threats.
The taking of money or property through fraud or misrepresentation
is theft if it is illegal under state or local law.
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_publink1000218596The 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_publink1000218597A 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_publink1000218598You 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_publink1000218599Casualty 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_publink1000218600Losses 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_publink1000218601A loss of future income is not deductible.
taxmap/pubs/p225-044.htm#en_us_publink1000218602A 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.
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.
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.
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_publink1000218607Farm 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 to farm property.
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. |
taxmap/pubs/p225-044.htm#en_us_publink1000218612Adjusted 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.
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_publink1000218615The 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_publink1000218617Generally, 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.
taxmap/pubs/p225-044.htm#en_us_publink1000218619A 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 |
| 1) | Adjusted basis | $3,300 | $28,000 |
| 2) | FMV before fire | $28,000 | $55,000 |
| 3) | FMV after fire | 10,000 | 25,000 |
| 4) | Decrease in FMV
(line 2 − line 3)
| $18,000 | $30,000 |
| 5) | Loss (lesser of line 1 or line 4) | $3,300 | $28,000 |
| 6) | Minus: Insurance | 2,100 | 26,000 |
| 7) | Deductible casualty loss | $1,200 | $2,000 |
| 8) | Total deductible casualty loss | $3,200 |
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 2010, 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.
| 1) | Adjusted basis | $16,000 |
| 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)
| $4,000 |
| 6) | Minus: Insurance | –0– |
| 7)
| Amount of loss | $4,000 |
taxmap/pubs/p225-044.htm#en_us_publink1000218624If 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.
|
taxmap/pubs/p225-044.htm#en_us_publink1000218626Food, 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.
taxmap/pubs/p225-044.htm#en_us_publink1000218627If 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_publink1000218628If 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_publink1000218629If 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.
|
taxmap/pubs/p225-044.htm#en_us_publink1000218631If 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_publink1000218632If 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_publink1000218633If 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.
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_publink1000218635You 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_publink1000218636You 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 (defined
later under
Disaster Area Losses) that occurred in 2008 or 2009, which may be deductible on
your 2010 tax return. For more information, see the Instructions for Form 4684.
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 |
| 2. | Subtract $100 | 100 |
| 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.
|
taxmap/pubs/p225-044.htm#en_us_publink1000218640Generally, 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. See the Instructions for Form
4684 if you are deducting a disaster loss of personal-use property that occurred
in 2008 or 2009.
taxmap/pubs/p225-044.htm#en_us_publink1000218641If 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_publink1000218642Robert leased a tractor from First Implement, Inc., for use in
his farm business. The tractor was destroyed by a tornado in June 2010. 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 2011,
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
2011. He can claim the $20,000 as a loss on his 2011 tax return.
taxmap/pubs/p225-044.htm#en_us_publink1000218643If 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_publink1000218644To 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_publink1000218645For 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_publink1000218648The 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_publink1000218649A 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.
| 1) | Insurance reimbursement | $40,000 |
| 2) | Legal expenses | 2,000 |
| 3) | Amount received
(line 1 − line 2)
| $38,000 |
| 4) | Adjusted basis | 25,000 |
|
5)
| Gain on casualty (line 3 − line 4) | $13,000 |
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