BeBe had a tough year! She had two different unfortunate casualties during the y

Question

BeBe had a tough year! She had two different unfortunate casualties during the year. First, her car was in an accident. Her car had a value of $20,000. Her basis (her cost) had been $30,000. After the accident, the value was reduced to only $10,000. Her insurance company reimbursed her for $3,000 only. Second, she had a separate free-standing storage she on her property, which burned down. The shed had a fair market value of $4,000, and a cost adjusted basis to BeBe of $3,500. Her insurance company reimbursed her $3,000 for her loss. If BeBe's adjusted gross income is $60,000, what is her deductible casualty loss, if any?

Explanation / Answer

One is eligible to claim a casualty deduction for your property loss if you suffer property damage during the tax year as a result of a sudden, unexpected or unusual event.

If you suffer property damage during the tax year as a result of a sudden, unexpected or unusual event, you may be eligible to claim a casualty deduction for your property loss. Typically, the property loss is caused by a car accident in which you are not at fault or the result of extreme weather such as tornadoes and hurricanes. However, the casualty deduction is also available if you are the victim of vandalism.

IRS requires you to use the smaller of the property’s tax basis or the decrease in fair market value in determining the deductible amount. In most cases, the tax basis is equal to the amount you originally pay for the property.

Cost $30,000
Value $20,000
Reimbursement $3,000.
Although your actual loss is the $27,000 for tax purposes, the loss is only $17,000 since this is the car’s fair market value less reimbursement on the day of the accident.

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