27. Nonbusiness Casualty and Theft Losses
Important Change
Postponed tax deadlines in disaster areas. The
maximum period of time for which the IRS may postpone certain tax deadlines of taxpayers
who are affected by a Presidentially declared disaster is increased from 120 days
to 1 year. 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. For more information, see Postponed tax deadlines, later,
under Disaster Area Loss.
Introduction
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.
- How to figure the amount of your loss.
- How to treat insurance and other reimbursements you receive.
- The deduction limits.
- 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 more of the following forms.
- Schedule A (Form 1040), Itemized Deductions
- 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
Casualty
A casualty is the damage, destruction, or loss of property resulting from an
identifiable event that is sudden, unexpected, or unusual.
- A sudden event is one that is swift, not gradual or progressive.
- An unexpected event is one that is ordinarily unanticipated and
unintended.
- 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.
- Car accidents (but see Nondeductible losses, next,
for exceptions).
- Earthquakes.
- Fires (but see Nondeductible losses, next, for exceptions).
- Floods.
- 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.
- Mine cave-ins.
- Shipwrecks.
- Sonic booms.
- Storms, including hurricanes and tornadoes.
- Terrorist attacks.
- Vandalism.
- Volcanic eruptions.
Nondeductible losses. 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.
- A fire if you willfully set it or pay someone else to set it.
- 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.
- 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.
- The steady weakening of a building due to normal wind and weather conditions.
- The deterioration and damage to a water heater that bursts. But the rust
and water damage to rugs and drapes caused by the bursting of a water heater does
qualify as a casualty.
- 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.
- Termite or moth damage.
- The damage or destruction of trees, shrubs, or other plants by a fungus, disease,
insects, worms, or similar pests. But, a sudden destruction due to an
unexpected or unusual infestation of beetles or other insects may result in a casualty
loss.
Theft
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.
- 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.
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.
Loss on Deposits
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.
- As a casualty loss.
- As an ordinary loss.
- As a nonbusiness bad debt.
The loss you can deduct as an ordinary loss is limited to $20,000 ($10,000 if you are
married filing separately) and applies only if the financial institution is not federally
insured.
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.
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 actual loss is determined
before you can deduct the loss as a nonbusiness bad debt.
How to report. The kind of deduction you choose for your loss on
deposits determines how you report your loss. If you choose:
- Casualty loss - report it on Form 4684 first and then on Schedule A (Form 1040).
- Ordinary loss - report it on Schedule A (Form 1040).
- 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.
Proof of Loss
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.
- 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.
Theft loss proof. For a theft loss, your records should show all the
following.
- When you discovered that 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.
Amount of Loss
Figure the amount of your loss using 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 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
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 14.
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.
Recovered stolen property. Recovered
stolen property is your property that was stolen and later returned to you. If you
recover 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 13.
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.
- The appraiser's familiarity with your property before and after the casualty or theft.
- The appraiser's knowledge of sales of comparable property in the area.
- The appraiser's knowledge of conditions in the area of the casualty.
- 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.
- 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 take care of 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.
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.
- Removing destroyed or damaged trees and shrubs minus any salvage you receive.
- Pruning and other measures taken to preserve damaged trees and shrubs.
- 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 30.
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.
Types of Reimbursements
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.
- You lose the use of your main home because of a casualty.
- Government authorities do not allow you access to your main home because of a casualty
or threat of one.
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 line 21 of Form 1040.
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.
- Rent for suitable housing.
- Transportation.
- Food.
- Utilities.
- Miscellaneous services.
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.
1) |
Insurance payment for living expenses |
$1,100 |
2) |
Actual expenses during the month you are unable to use your home because of the fire |
$1,600 |
|
3) |
Normal living expenses |
725 |
|
4) |
Temporary increase in living ex- penses: Subtract line 3 from line 2 |
875 |
5) |
Amount of payment includible in income: Subtract line 4 from line 1 |
$225 |
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
2000. You regained use of your home in November 2001. The insurance payments you received
in 2000 and 2001 were $1,500 more than the temporary increase in your living expenses
during those years. You include this amount in income on your 2001 Form 1040. If, in 2002,
you receive further payments to cover the living expenses you had in 2000 and 2001, you
must include those payments in income on your 2002 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 in tax years ending after September 10, 2001, for
expenses you incurred as a result of a Presidentially declared disaster, are not taxable
income to you. For information on qualified disaster relief payments, 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 an FMV of $2,000 when it was
destroyed in a collision with another car last year. The accident was due to the
negligence of the other driver. At the end of the year, 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 last year.
This January, 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 this year 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 13.
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. Last December, 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 last year.
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
this year, do not report it as income.
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