You figure the amount of your loss using the following steps.

1. Determine your adjusted basis in the property before the casualty or theft.
2. Determine the decrease in fair market value of the property as a result of the casualty or theft.
3. 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 the reimbursement you receive or expect to receive.

Adjusted Basis

Adjusted basis is your basis (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 have 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 property. Recovered 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 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. The 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.

Appraisal fee. The appraisal fee is not a part of the casualty or theft loss. It is an expense in determining your tax liability. You can deduct it as a miscellaneous deduction subject to the 2%-of-adjusted-gross- income limit on Schedule A (Form 1040). For information about miscellaneous deductions, see chapter 30.

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.

1. The repairs are necessary to bring the property back to its condition before the casualty.
2. The amount spent for repairs is not excessive.
3. The repairs take care of the damage only.
4. 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.

1. Removing destroyed or damaged trees and shrubs minus any salvage you receive.
2. Pruning and other measures taken to preserve damaged trees and shrubs.
3. Replanting necessary to restore the property to its approximate value before the casualty.

Car values. 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 fair market value.

Decline in market value of property. 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.

Photographs. 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.

The cost of photographs obtained for this purpose is not a part of the loss. You can claim this cost 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 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 claim for reimbursement. If your property is covered by insurance, you should 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 it.

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 more 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 the 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, then 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 $5,000 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 $5,000 you received from your employer's fund. Your casualty loss before applying the deduction limits discussed later is $5,000.

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 the amount of these excludable 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 applied part of the cash gifts to the cost of repairing your home. There were no limits or restrictions on how you could use the cash gifts. The money you received as excludable gifts and used to pay for repairs to your home does not reduce the amount of 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 a casualty.

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.

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 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 amount of 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 expenses: Subtract line 3 from line 2		875
5)	Amount of payment includible in income: Subtract line 4 from line 1		$225

Example. Your main home was destroyed by a tornado in August 1997. You regained use of your home in November 1998. The insurance payments you received in 1997 and 1998 were $1,500 more than the temporary increase in your living expenses during those years. You include this amount in income on your 1998 Form 1040. If, in 1999, you receive further payments to cover the living expenses you had in 1997 and 1998, you must include those payments in income on your 1999 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.

Reimbursement Received After Deducting Loss

If you figured your casualty or theft loss using your expected reimbursement, you may have to adjust the tax return for the tax year in which you get 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, you 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 claim this as a casualty loss, subject to the deduction limits discussed later.

Actual reimbursement more than expected. If you 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 your 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.

Actual reimbursement same as expected. If you receive exactly the reimbursement you expected to receive, 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. As a result of your expected 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 you paid. When you receive the $850 from the insurance company this year, you do not have to report it as income.

Examples

Personal property. If a single casualty or theft involves more than one item of personal property, you must figure the loss on each item separately. Then combine the losses to determine your total loss from that casualty or theft. Personal property is any property that is not real property.

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:

		Chair	Rug	Table
1)	Basis (cost)	$750	$3,000	$100
2)	FMV before fire	$500	$2,500	$900
3)	FMV after fire	-0-	-0-	-0-
4)	Decrease in FMV	$500	$2,500	$900
5)	Loss (smaller of (1) or (4))	$500	$2,500	$100
6)	Total loss			$3,100

Example. You bought your home a few years ago. You paid $50,000 ($10,000 for the land and $40,000 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 $75,000 before the fire, but only $15,000 after the fire. (The loss to your household furnishings is not shown in this example. It would be figured separately, as explained earlier under Personal property.) Shortly after the fire, the insurance company paid you $45,000 for the loss. Your adjusted gross income is $48,000. You figure your casualty loss as follows:

1)	Adjusted basis of the entire property (cost of land, building, and landscaping)	$52,000
2)	FMV of entire property before fire	$75,000
3)	FMV of entire property after fire	15,000
4)	Decrease in FMV of entire property	$60,000
5)	Loss (smaller of (1) or (4))	$52,000
6)	Subtract insurance	45,000
7)	Amount of loss	$7,000

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