| Publication 17 |
2008 Tax Year |
25.
Nonbusiness Casualty and Theft Losses
Kansas and Midwestern disaster areas. The following paragraphs explain the special rules that apply to casualties and thefts of taxpayers in both the Kansas disaster area (defined below) who were affected by storms and tornadoes that began on May 4, 2007, and Midwestern disaster areas (defined below). In addition, you may be entitled to other tax benefits not covered in this publication. 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 or stolen has been extended from 2 to 5 years. For
more information, see Publication 547, Casualties, Disasters and Thefts.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 above, a Midwestern disaster area is an area that has been declared a major disaster 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.For
a list of counties in Midwestern disaster areas, see Table 4, in Pub. 547.
Federally declared disasters. New rules apply to losses of personal use property attributable to federally declared disasters declared in tax years beginning
after 2007 and that occur before 2010. The new rules discussed below do not apply to losses in Midwestern disaster areas.
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The net disaster loss (defined in (3) below) is not subject to the 10% of adjusted gross income limit.
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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 6 of the Standard Deduction Worksheet-Line 40 in the Form 1040 instructions.
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Your net disaster loss is the excess of—
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Your personal casualty losses attributable to a federally declared disaster and occurring in a disaster area, over
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Your personal casualty gains.
Special rules for individuals impacted by Hurricanes Katrina, Rita, and Wilma. 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.For more information, see Reimbursement Received After Deducting Loss later.
Personal casualty and theft loss limit. Generally, a personal casualty or theft loss must exceed $500 to be allowed for 2009. This is in addition to the 10% of AGI
limit that generally applies to the net loss.
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.
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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.
Forms to file.
When you have a casualty or theft, you have to file Form 4684. You will also have to file one or both of the following forms.
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Schedule A (Form 1040), Itemized Deductions
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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
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Schedule D (Form 1040)
Capital Gains and Losses
-
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.
Deductible losses.
Deductible casualty losses can result from a number of different causes, including the following.
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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.
Nondeductible losses.
A casualty loss is not deductible if the damage or destruction is caused by the following.
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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).
Family pet.
Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed
earlier under Casualty are met.
Example.
Your antique oriental rug was damaged by your new puppy before it was housebroken. Because the damage was not unexpected and
unusual, the loss is not deductible as a casualty loss.
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.
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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.
Theft includes the taking of money or property by the following means.
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Blackmail.
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Burglary.
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Embezzlement.
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Extortion.
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Kidnapping for ransom.
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Larceny.
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Robbery.
The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.
Decline in market value of stock.
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.
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.
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.
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 permission from the Internal Revenue Service.
If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23.
The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance
proceeds. Your loss is subject to the 2%-of-adjusted-gross-income limit. You cannot choose to claim an ordinary loss if any
part of the deposit is federally insured.
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 year the
actual loss is determined and deduct the loss as a nonbusiness bad debt in that year.
How to report.
The kind of deduction you choose for your loss on deposits determines how you report your loss. If you choose:
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Casualty loss — report it on Form 4684 first and then on Schedule A (Form 1040).
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Ordinary loss — report it on Schedule A (Form 1040) as a miscellaneous itemized deduction.
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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 or Deposit in Insolvent or Bankrupt Financial Institution in Publication 550.
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.
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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.
Theft loss proof.
For a theft loss, your records should show all the following.
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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.
It is important that you have records that will prove your deduction. If you do not have the actual records to support your
deduction, you can use other satisfactory evidence to support it.
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.
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.
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 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.
FMV of stolen property.
The FMV of property immediately after a theft is considered to be zero, since you no longer have the property.
Example.
Several years ago, you purchased silver dollars at face value for $150. This is your adjusted basis in the property. Your
silver dollars were stolen this year. The FMV of the coins was $1,000 just before they were stolen, and insurance did not
cover them. Your theft loss is $150.
Recovered stolen property.
Recovered stolen property is your property that was stolen and later returned to you. If you recovered 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 later) 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 12.
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.
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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.
You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally
declared disaster to establish the amount of your disaster loss. For more information on disasters, see Disaster Area Losses,
in Pub. 547.
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 after a casualty as a measure of the decrease in FMV if
you meet all the following conditions.
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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.
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.
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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.
Car value.
Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. You can
use the book's retail values and modify them 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
You generally should not consider the following items when attempting to establish the decrease in FMV of your property.
Cost of protection.
The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. The amount
you spend on insurance or to board up your house against a storm is not part of your loss.
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.
Exception.
You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with
respect to qualified disaster mitigation payments. See Disaster Area Losses in Publication 547.
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.
Replacement cost.
The cost of replacing stolen or destroyed property is not part of a 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 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 28.
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.
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, because 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.
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 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.
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.
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 Form 1040, line 21. However, if the casualty occurs in a federally declared disaster
area, none of the insurance payments are taxable. See Qualified disaster relief payments, under Disaster Area Losses in Publication 547.
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.
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.
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 2006. You regained use of your home in November 2007. The insurance payments
you received in 2006 and 2007 were $1,500 more than the temporary increase in your living expenses during those years. You
include this amount in income on your 2007 Form 1040. If, in 2008, you receive further payments to cover the living expenses
you had in 2006 and 2007, you must include those payments in income on your 2008 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.
Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster are
not taxable income to you. For more information, see Disaster Area Losses in Publication 547.
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.
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 in 2007. The accident was due
to the negligence of the other driver. At the end of 2007, 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 2007.
In January 2008, 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 2008 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 12.
You do not have to include the extra reimbursement in your income for the year you receive it if you make the choice discussed
later under Individuals impacted by Hurricanes Katrina, Rita, and Wilma.
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 to receive, you do not have to include any of the reimbursement
in your income and you cannot deduct any additional loss.
Example.
In December 2008, 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 2008.
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 2009, do
not report it as income.
Individuals impacted by Hurricanes Katrina, Rita, and Wilma.
If you claimed a casualty loss for damage to or destruction of your main home as a result of Hurricane Katrina, Rita,
or Wilma, and in a later year you receive a qualified hurricane relief grant as reimbursement, you do not have to include
the extra reimbursement in your income as explained earlier under Actual reimbursement more than expected. Instead, you can choose to file an amended return (Form 1040X) for the tax year in which you claimed the casualty loss deduction
and reduce (but not below zero) the amount of the deduction by the amount of the grant. To qualify, the grant must have been
issued under Public Law 109-148, 109-234, or 110-116. Qualified grants include the Louisiana Road Home Grant and the Mississippi
Development Authority Hurricane Katrina Homeowner Grant.
Form 1040X and required attachments.
If you choose to file Form 1040X as discussed above, write “ Hurricane Grant Relief” in dark, bold letters at the top of the form and attach the following items.
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Proof of the amount of the hurricane relief grant received.
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A completed Form 2848, Power of Attorney and Declaration of Representative, if you wish to designate a representative. (Do
not attach if a valid Form 2848 is on file with the IRS.)
Do not include on Form 1040X any adjustments other than the reduction of the casualty loss deduction if the period of limitations
on assessment is closed for the tax year for those adjustments.
If you previously filed an amended return for the casualty loss year that (1) reduced the previously claimed casualty
loss deduction by the grant amount or (2) reported any of the grant amount as income, you must notify the IRS to receive the
benefits described above. You must send the following documents to the IRS at the address given later.
-
A copy of the previously filed Form 1040X, or submit a Form 843, Claim for Refund and Request for Abatement. These forms must
include your own contact information as well as a properly executed Form 2848, if applicable.
-
Copies of the original return for the year of the casualty loss deduction and any other amended returns for that year.
-
Copies of the original return and amended returns, if any, for the year you received the grant if any portion of the grant
was previously reported as income in the year you received it.
You must send these documents by the date given later under When to file Form 1040X. The IRS will contact you or your representative, as appropriate, to discuss any necessary adjustments.
When to file Form 1040X.
File Form 1040X and attachments by the later of:
Solely for purposes of determining whether you are eligible for the waiver of penalties and interest for purposes of the procedure
discussed here, the IRS will treat any amended return filed before July 30, 2009, as filed on July 30, 2009.
Where to file Form 1040X.
Mail Form 1040X and attachments to the following address.
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0255
Payment of balance due.
To avoid interest and penalties, you must pay the balance due on Form 1040X within one year of the timely filing of
that form. Payments made after you file Form 1040X should clearly designate that the payment is to be applied to reduce the
balance due shown on the Form 1040X per IRS Notice 2008-95. The IRS will not take action to collect the balance due reflected
on Form 1040X for the one year period following the filing of Form 1040X.
Assessment of balance due.
After you file Form 1040X, the IRS immediately will assess the balance due resulting from the reduction in the casualty
loss claimed. This assessment will be reflected on your account as an outstanding liability.
Single Casualty on Multiple Properties
Personal property.
Personal property is any property that is not real property. If your personal property is stolen or is damaged or
destroyed by a casualty, you must figure your loss separately for each item of property. Then combine these separate losses
to determine your total loss from that casualty or theft.
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:
Real property.
In figuring a casualty loss on personal-use real property, treat the entire property (including any improvements,
such as buildings, trees, and shrubs) as one item. Figure the loss using the smaller of the adjusted basis or the decrease
in FMV of the entire property.
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:
Table 25-1. How To Apply the Deduction Limits for Personal-Use Property
| |
$100 Rule1
|
10% Rule2
|
| 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. |
1The $100 rule does not apply if your loss arose in the Kansas disaster area or a Midwestern disaster area (defined at the
beginning of this chapter under What's New for 2008).
2The 10% rule does not apply if your loss arose in the Kansas disaster area or a Midwestern disaster area. It also does not
apply to a net disaster loss attributable to a federally declared disaster (defined at the beginning of this chapter under
What's New for 2008). |
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.
-
You must reduce each casualty or theft loss by $100 ($100 rule).
-
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.
Property used partly for business and partly for personal purposes.
When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty
or theft loss deduction must be figured separately for the personal-use part and for the business or income-producing part.
You must figure each loss separately because the $100 rule and the 10% rule apply only to the loss on the personal-use part
of the property.
This rule does not apply if your loss arose in the Kansas disaster area or a Midwestern disaster area (as defined at the beginning
of this chapter under What's New for 2008).
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.
Example.
A hailstorm damages your home and your car. Determine the amount of loss, as discussed earlier, for each of these items. Since
the losses are due to a single event, you combine the losses and reduce the combined amount by $100.
Single event.
Generally, events closely related in origin cause a single casualty. It is a single casualty when the damage is from
two or more closely related causes, such as wind and flood damage caused by the same storm.
This rule does not apply to a loss arising in the Kansas disaster area or a Midwestern disaster area (defined at the beginning
of this chapter under What's New for 2008, or a net disaster loss attributable to a federally declared disaster.
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. 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.
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 $1,200. 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 $1,700. Your adjusted gross income for the year that the accident and fire occurred is $25,000. You figure your casualty
loss deduction as follows.
Gains and losses.
If you had both gains and losses from casualties or thefts to personal-use property, you must compare your total gains
to your total losses. Do this after you have reduced each loss by any reimbursements and by $100, but before you have reduced
the losses by 10% of your adjusted gross income.
Casualty or theft gains do not include gains you choose to postpone. See Publication 547 for information on the postponement
of gain.
Losses more than gains.
If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by
10% of your adjusted gross income. The rest, if any, is your deductible loss.
Gains more than losses.
If your recognized gains are more than your losses, subtract your losses from your gains. The difference is treated
as capital gain and must be reported on Schedule D (Form 1040). The 10% rule does not apply to your gains.
When To Report Gains and Losses
Gains.
If you receive an insurance or other reimbursement that is more than your adjusted basis in the destroyed or stolen
property, you have a gain from the casualty or theft. You must include this gain in your income in the year you receive the
reimbursement, unless you choose to postpone reporting the gain as explained in Publication 547.
If you have a loss, see
Table 25-2.
Table 25-2. When To Deduct a Loss
| 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. |
Losses.
Generally, you can deduct a casualty loss that is not reimbursable only in the tax year in which the casualty occurred.
This is true even if you do not repair or replace the damaged property until a later year.
You can deduct theft losses that are not reimbursable only in the year you discover your property was stolen.
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.
Loss on deposits.
If your loss is a loss on deposits in an insolvent or bankrupt financial institution, see
Loss on Deposits,
earlier.
You generally must deduct a casualty loss in the year it occurred. However, if you have a casualty loss from a federally declared
disaster or a Kansas disaster that occurred in an area warranting public or individual assistance (or both) or from a Midwestern
disaster, you can choose to deduct the loss on your tax return or amended return for either of the following years.
Gains.
Special rules apply if you choose to postpone reporting gain on property damaged or destroyed in a federally declared
disaster area. For those special rules, see Publication 547.
Postponed tax deadlines.
The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared
disaster. 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.
If any tax deadline is postponed, the IRS will publicize the postponement in your area by publishing a news release,
revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB).
Who is eligible.
If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement.
-
Any individual whose main home is located in a covered disaster area (defined next).
-
Any business entity or sole proprietor whose principal place of business is located in a covered disaster area.
-
Any individual who is a relief worker affiliated with a recognized government or philanthropic organization who is assisting
in a covered disaster area.
-
Any individual, business entity, or sole proprietor whose records are needed to meet a postponed 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.
-
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.
-
The spouse on a joint return with a taxpayer who is eligible for postponements.
-
Any other person determined by the IRS to be affected by a federally declared disaster.
Covered disaster area.
This is an area of a federally declared disaster in which the IRS has decided to postpone tax deadlines for up to
1 year.
Abatement of interest and penalties.
The IRS may abate the interest and penalties on underpaid income tax for the length of any postponement of tax deadlines.
More information.
For more information, see Disaster Area Losses in Publication 547.
How To Report Gains and Losses
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.
Note.
Do not use Schedule A (Form 1040) if you are deducting a net disaster loss as part of your standard deduction.
Adjustments to basis.
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. Amounts you spend to restore your property after a casualty increase your adjusted
basis. See
Adjusted Basis
in chapter 13 for more information.
Net operating loss (NOL).
If your casualty or theft loss deduction is more than your income, you may have an NOL. You can use an NOL to lower your tax
in an earlier year, allowing you to get a refund for tax you have already paid. Or, you can use it to lower your tax in a
later year. You do not have to be in business to have an NOL from a casualty or theft loss. For more information, see Publication
536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
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