|Tax Topic #515
||2008 Tax Year
Topic 515 - Casualty, Disaster, and Theft Losses
A casualty loss can result from the damage, destruction or loss of your
property from any sudden, unexpected, and unusual event such as a flood, hurricane,
tornado, fire, earthquake or even volcanic eruption.
If your property is not completely destroyed, or if it is personal-use
property, the amount of your casualty or theft loss is the lesser of the adjusted
basis of your property, or the decrease in fair market value of your property
as a result of the casualty or theft. The adjusted basis of your property
is usually your cost, increased or decreased by certain events such as improvements
or depreciation. For more information about the basis of property, refer to Topic 703, or Publication 547, Casualties, Disasters,
and Thefts. You may determine the decrease in fair market value by appraisal
or, if certain conditions are met, by the cost of repairing the property.
For more information, refer to Publication 547. Keep in mind the general definition
of fair market value is the price at which property would change hands between
a buyer and seller, neither having to buy or sell, and both having reasonable
knowledge of all necessary facts.
If the property was held by you for personal use, you must further reduce
your loss by $100. This $100 reduction for losses of personal-use property
applies to each casualty or theft event that occurred during the year. The
total of all your casualty and theft losses of personal-use property must
be further reduced by 10% of your adjusted gross income.
For more information regarding casualty losses of personal-use property
and how to deduct them, refer to Topic 507 and Publication 547, Casualties,
Disasters, and Thefts.
If your business or income-producing property is completely destroyed,
the decrease in fair market value is not considered. Your loss is the adjusted
basis of the property, minus any salvage value and any insurance or other
reimbursement you receive or expect to receive. For more information on determining
adjusted basis, see Publication 551, Basis of Assets.
In figuring your loss, do not consider the loss of future profits or income
due to the casualty.
Casualty losses are claimed on Form 4684 (PDF), Casualties
and Thefts. Section A is used for personal–use property and Section
B is used for business or income-producing property. If personal-use property
was destroyed or stolen, you may wish to refer to Publication 584, Casualty,
Disaster, and Theft Loss Workbook (Personal-Use Property). For losses
involving business-use property, refer to Publication 584B (PDF), Business Casualty, Disaster, and Theft Loss Workbook.
Casualty losses are generally deductible only in the year the casualty
occurred. However, if you have a deductible loss from a disaster in a Presidentially
declared disaster area, you can choose to deduct that loss on your tax return
for the year immediately preceding the year of the casualty. If you have already
filed your return for the preceding year, the loss may be claimed in the preceding
year by filing an amended return, ( Form 1040X (PDF) for
Individuals or Form 1120X (PDF) for Corporations).
Generally, you must make the choice to use the preceding year by the due
date of the current year's return, without extensions.
The election to deduct a 2005 disaster loss on your 2004 return must be
made on or before the due date (without extensions) of the 2005 return.
You can revoke this choice within 90 days after making it by returning
to the IRS any refund or credit you received from making the choice. If you
revoke your choice before receiving a refund, you must return the refund within
30 days after receiving it for the revocation to be effective.
Generally, you can choose to postpone reporting gain due to insurance proceeds
that exceed your basis in property destroyed or damaged by a casualty if you
purchase replacement property or repair the damage within two years. Postponement
of gain is only available if the amount you spend on replacing or repairing
your property is equal to, or exceeds, the insurance proceeds you receive.
Otherwise, the excess of the insurance proceeds over the amount you spend
to replace or repair your property must be reported as gain.
If your main home, or any of its contents, is damaged or destroyed as a
result of a disaster in a Presidentially declared disaster area, do not report
any gain due to insurance proceeds you receive for unscheduled personal property,
such as damaged furniture, that was part of the contents of your home. You
can choose to postpone gain from any other insurance proceeds received for
your main home or its contents if you purchase replacement property within
four years after the close of the first tax year in which any gain is realized.
For this purpose, insurance proceeds received for the home or its contents
are treated as being received for a single item of property, and any replacement
property you purchase that is similar or related in service or use to your
home or its contents is treated as similar or related in service or use to
that single item of property. Again, postponement of gain is only available
if the amount you spend on replacing or repairing your property is equal to,
or exceeds, the insurance proceeds you receive. Otherwise, you must recognize
gain to the extent that the insurance proceeds are more than the cost of your
replacement property. Renters qualify to choose relief under these rules if
the rented residence is their main home.
If your home is located in a Presidentially declared disaster area and
your state or local government orders you to tear it down or move it because
it is no longer safe to live in, the resulting loss in value is treated as
a casualty loss from a disaster. Figure your loss in the same way as any other
casualty loss of personal-use property. The State or local government order
must be issued within 120 days after the area is declared a disaster area.
If your loss deduction is more than your income, you may have a net operating
loss. You do not have to be in business to have a net operating loss from
a casualty. For more information, refer to Publication 536, Net Operating
The IRS may postpone for up to one year certain tax deadlines of taxpayers
who are affected by a Presidentially declared disaster. The tax deadlines
the IRS may postpone include those for filing income, estate, gift, generation-skipping
transfer, certain excise, and employment tax returns, paying taxes associated
with those returns, and making contributions to a traditional IRA or Roth
If the IRS postpones the due date for filing your return and for paying
your tax and you are affected by a Presidentially declared disaster area,
the IRS may abate the interest on underpaid tax that would otherwise accrue
for the period of the postponement.
Page Last Reviewed or Updated: December 22, 2008
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