Casualty And Theft Losses

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The rules governing theft losses frequently intersect with the IRC Section 1033 provisions governing involuntary conversions (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8670">8670</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8673">8673</a>). The rules on involuntary conversions govern the treatment of any reimbursement that a taxpayer receives as a result of a loss, such as a casualty or theft loss.<br /> <br /> Therefore, if a taxpayer receives insurance proceeds, for example, that exceed the amount lost as a result of a casualty or theft, the taxpayer would look to the rules on involuntary conversions for determining whether the gain must be recognized.<a href="#_ftn2" name="_ftnref2">²</a> In these circumstances, the gain is characterized as stemming from an involuntary conversion because the casualty in effect causes the damaged property to suddenly be converted into cash from the insurance proceeds. The rules for determining what gain is or is not subject to taxation in involuntary conversions may differ for federally declared disasters.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 165(h)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRS Publication 225.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; AICPA Casualty Loss Practice Guide (September 2014).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor’s Note:</em> Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In general, a casualty loss deduction is only allowable to the extent that the taxpayer is not otherwise compensated for the loss by insurance or reimbursement from another third party.<br /> <br /> However, if a taxpayer’s casualty loss <em>would have</em> been covered by insurance, but the taxpayer fails to file a timely insurance claim with respect to the loss, the casualty loss deduction will be disallowed regardless of whether the taxpayer actually receives any insurance proceeds as compensation for the loss.<a href="#_ftn2" name="_ftnref2">²</a> Thus, if a taxpayer chooses not to file an insurance claim with respect to a loss, the casualty loss deduction will be limited to the portion of the loss that would <em>not</em> have been covered by insurance.<br /> <br /> Further, a taxpayer is not entitled to deduct an otherwise allowable casualty loss if the loss has already been claimed for estate tax purposes on an estate tax return.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 165(h)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 165(h)(4)(E).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 165(h)(4)(D).<br /> <br /> </div>

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If a taxpayer sustains a casualty loss with respect to property used in the taxpayer&rsquo;s trade or business, the taxpayer will not be subject to the $100 floor or 10 percent of adjusted gross income limitations described in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8714">8714</a>. The taxpayer who sustains a casualty loss in connection with a trade or business can take the deduction as a business deduction.<br /> <br /> A taxpayer who uses property and sustains a casualty or theft loss in performing services as an <em>employee</em> can deduct the casualty or theft loss as a miscellaneous itemized deduction subject to the 2 percent limit on these deductions (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8528">8528</a>).<a href="#_ftn2" name="_ftnref2">²</a> However, all miscellaneous itemized deductions subject to the 2 percent floor were suspended for 2018-2025. If the property subject to the loss was investment-type property held for profit, the deduction will not be subject to the 2 percent limit on miscellaneous itemized deductions.<a href="#_ftn3" name="_ftnref3">³</a> This kind of investment-type property includes stocks, notes, bonds, gold, silver, vacant lots, and works of art.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 165(h)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRS Publication 529.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRS Publication 529.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRS Publication 529.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.<a href="#_ftn1" name="_ftnref1">¹</a> However, if a taxpayer has personal casualty <em>gains</em>, the new rules do not apply (even if the loss does not occur in a federal disaster area) so long as the losses do not exceed the gains. This essentially means that casualty losses will continue to offset casualty gains.<a href="#_ftn2" name="_ftnref2">²</a> This provision applies for tax years beginning after December 31, 2017 and before January 1, 2026. The rules outlined below generally apply for tax years beginning before 2018, and for losses that are sustained in a disaster area.<br /> <br /> A casualty loss is a loss that an individual taxpayer suffers as a direct result of an event that meets the following criteria:<br /> <p style="padding-left: 40px;">(1)&nbsp; It is identifiable;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; It is damaging to property; and</p><br /> <p style="padding-left: 40px;">(3)&nbsp; It is sudden, unexpected, and unusual in nature.<a href="#_ftn3" name="_ftnref3">³</a></p><br /> IRC Section 165 specifically permits a casualty loss deduction for fire, storm, shipwreck or &ldquo;other casualty.&rdquo;<a href="#_ftn4" name="_ftnref4">⁴</a> The term &ldquo;other casualty&rdquo; has been interpreted to include damage sustained as a result of, among other events, floods<a href="#_ftn5" name="_ftnref5">⁵</a> and sudden freezing.<a href="#_ftn6" name="_ftnref6">⁶</a> Other deductible casualty losses that are specifically allowed by the IRS include damage caused by fire, earthquake, government ordered demolition or relocation of a home rendered unsafe due to a disaster, mine cave-ins, shipwrecks, sonic booms, storms, terrorist attacks, vandalism and volcanic eruptions.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The Tax Court allowed a taxpayer&rsquo;s casualty loss deduction for damage caused by blasting operations when the damage caused by the particular blast was unusual and heavier than the blasting that had occurred on a day-to-day basis in the area.<a href="#_ftn8" name="_ftnref8">⁸</a> The Tax Court has also permitted a casualty loss deduction for damage sustained due to vandalism, because the vandalism in question was caused by persons outside of the taxpayers&rsquo; control, was sudden in nature and destructive in effect.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Damage to property created by termite infestation was <em>not</em> considered to be a casualty loss, because the damage was created by a progressive deterioration of property resulting from a steady cause operating over time&mdash;essentially, the casualty loss deduction was denied because the event that caused the destruction was not &ldquo;sudden&rdquo; in nature.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> A taxpayer was not entitled to claim a casualty deduction for losses sustained because of the worthlessness of currency held by the taxpayer. The Tax Court found that &ldquo;other casualty&rdquo; must be interpreted to mean an event similar to &ldquo;fire, storm or shipwreck&rdquo; and that a decrease in currency value was not a similar event. Further, the Court noted that the taxpayers still held the currency at issue&mdash;and thus, it was not technically damaged.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> Further, costs incurred by a taxpayer to <em>prevent</em> a potential casualty loss are not deductible under IRC Section 165 as casualty losses. According to the courts, such preventative steps are not sudden and unexpected in nature, and thus do not qualify as events giving rise to casualty loss treatment.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> Special rules apply if a taxpayer suffers a casualty loss within a federally declared disaster area (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8719">8719</a>.).<br /> <br /> Generally, casualty losses are deductible during the taxable year that the loss occurred (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8712">8712</a>).<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 165(h)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; P.L. 115-97, &sect; 11044.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em><em>See</em> Fay v. Helvering,</em> 120 F.2d 253 (2d Cir. 1941); <em>Torre v. Commissioner</em>, TC Memo 2001-218; <em>Matheson v. Commissioner</em>, 54 F.2d 537 (2d Cir. 1931).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect; 165(c)(3).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; <em>Finkbohner v. United States</em>, 788 F.2d 723 (11th Cir. 1986).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; <em>United States v. Barret</em>, 202 F.2d 804 (5th Cir. 1953).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRS Pub. 547, Casualties, Disasters and Thefts (2019).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; <em>Durden v. Commissioner</em>, 3 TC 1 (1944).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; <em>Davis v. Commissioner</em>, 34 TC 586 (1960).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; <em>Fay v. Helvering,</em> 120 F.2d 253 (2d Cir. 1941).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; <em>Billman v. Commissioner</em>, 73 TC 139 (1979).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; <em><em>See</em> Austin v. Commissioner</em>, 74 TC 1334 (1980).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp; IRS Pub. 547.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor’s Note:</em> Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If a taxpayer has suffered a casualty (or theft) loss, regardless of whether the loss is personal in nature or is related to trade or business activities, the taxpayer may be entitled to deduct the lesser of the following amounts:<br /> <p style="padding-left: 40px;">(1)  The fair market value immediately before the casualty <em>minus</em> the fair market value of the property immediately after the casualty; or</p><br /> <p style="padding-left: 40px;">(2)  The adjusted basis of the property that would be used for determining the taxpayer’s gain or loss if the property was sold or otherwise disposed of.<a href="#_ftn2" name="_ftnref2">²</a></p><br /> <br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Although the regulations use the term “immediately after” when referring to the post-casualty value, the IRS recognizes that taxpayers’ ability to determine the decrease in the fair market values of their properties, as a result of a disaster, may be restricted by lack of access to the properties and the need to remove water from flooded properties. Under these circumstances, the decrease in fair market value would take into account additional damage sustained to the property as a result of delays due to legal and physical restrictions to taxpayers’ access to their property and the need to remove standing water from the properties.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr /><br /> <br /> The fair market value of the property must be ascertained by appraisal, and this appraisal must consider the impact of any general market decline affecting undamaged property (as well as damaged property) that may have occurred at the same time as the casualty, so that the casualty loss is limited to the actual loss caused by the casualty.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The taxpayer claiming the casualty loss may use the actual cost of repairs to the property as evidence of the amount of loss if the following conditions are met:<br /> <p style="padding-left: 40px;">(1)  The repairs are necessary to restore the property to its condition immediately before the casualty;</p><br /> <p style="padding-left: 40px;">(2)  The cost of the repairs is not excessive;</p><br /> <p style="padding-left: 40px;">(3)  The repairs only fix the damage suffered as a result of the casualty; and</p><br /> <p style="padding-left: 40px;">(4)  The repairs do not cause the value of the property to exceed the value of the property immediately before the casualty.<a href="#_ftn5" name="_ftnref5">⁵</a></p><br /> The cost of repairs may, in certain cases, be used to measure the decline in fair market value, but it cannot be used by itself to determine the amount of the loss. When the cost of repairs is determined to be a fair measure of the decline in fair market value, then the fair market value of the property before the casualty is reduced by the cost of repairs to arrive at the fair market value after the casualty.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> If the property at issue was used in a trade or business (or otherwise held for the production of income) and was totally destroyed by the casualty, the taxpayer may use the adjusted basis to determine the amount of loss if the fair market value of the property immediately before the casualty is less than the adjusted basis.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> When property used in a taxpayer’s trade or business (or otherwise held for profit) is destroyed, each single, identifiable piece of property must be considered separately in computing the amount of loss.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <p style="padding-left: 40px;"><em>Example:</em> Chase owns a marina comprised of a large storage building and a boat docking area. The marina is badly damaged in a hurricane. In determining the fair market value of the property for purposes of determining loss, Chase must measure the decrease in value by taking the building and the docks into account separately, rather than together as two integral pieces of the property as a whole. In other words, he must determine the losses separately for the building and the docks.</p><br /> However, where separate property is considered to be an integral piece of the property as a whole (for example, ornamental trees and shrubs on residential property), no separate calculation is made.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 165(h)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.165-7(b)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRS FAQS for Disaster Victims-Casualty Loss (Valuations and Section 165(i), July 9, 2020).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  Treas. Reg. § 1.165-7(a)(2)(i).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  Treas. Reg. § 1.165-7(a)(2)(ii); https://www.irs.gov/businesses/small-businesses-self-employed/faqs-for-disaster-victims.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.  IRS FAQS, above.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.  Treas. Reg. § 1.165-7(b)(1) (flush language).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.  Treas. Reg. § 1.165-7(b)(2).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.  <em><em>See</em> Western Products Co. v. Commissioner</em>, 28 TC 1196 (1957).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Prior to 2018, a taxpayer could choose to treat a qualified insolvent financial institution loss as a casualty loss if it could be ascertained with reasonable certainty that there was a loss on a qualified individual&rsquo;s deposit in a qualified financial institution and that the loss was caused by the bankruptcy or insolvency of that institution.<a href="#_ftn1" name="_ftnref1">[1]</a> &ldquo;Deposit&rdquo; for this purpose means any deposit, withdrawable account or withdrawable or repurchasable share.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The term &ldquo;qualified individual&rdquo; is defined by exclusion as any individual <em>other than</em> an individual who:<br /> <p style="padding-left: 40px;">(1)&nbsp; owns at least 1 percent of the outstanding stock of the qualified institution;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; is an officer of the qualified institution; or</p><br /> <p style="padding-left: 40px;">(3)&nbsp; is related to a person described in (1) or (2), above.<a href="#_ftn3" name="_ftnref3">³</a></p><br /> A &ldquo;qualified financial institution&rdquo; is a bank, mutual savings bank, credit union (if its deposits are insured or protected under federal or state law) or any similar institution that is chartered and supervised under either federal or state law.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> If the taxpayer elects to treat a qualified insolvent financial institution loss as a casualty loss, the election applies to all losses in that same financial institution for the tax year. The election can only be revoked with the consent of the Secretary.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> In the alternative, and while the casualty loss rules are suspended from 2018-2025, a taxpayer may elect to treat the loss as an ordinary loss in order to avoid the limits on the casualty loss deduction discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8714">8714</a>. However, with respect to each financial institution, the taxpayer is only permitted to elect an ordinary loss deduction of up to $20,000 ($10,000 for married taxpayers filing separately). The taxpayer may <em>not</em> elect ordinary loss treatment if the deposit in question was federally insured.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> An election to treat a qualified insolvent financial institution loss as a casualty loss precludes treating the loss as a bad debt.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 165(l)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 165(l)(4).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect; 165(l)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect; 165(l)(3).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect; 165(l)(6).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect; 165(l)(5).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect; 165(l)(7).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> The 2017 tax reform legislation suspended the generally available deduction for casualty and theft losses for 2018-2025, with the exception of losses sustained in a federally declared disaster zone. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8720">8720</a> for a discussion of the special relief created for victims of qualified 2016 disasters.<br /> <br /> In recognition of the fact that taxpayers who sustain casualty losses as a result of disasters often have an immediate need for relief, the IRC contains provisions that accelerate the recognition of tax benefits to which disaster victims are entitled.<br /> <br /> As such, disaster victims are entitled to claim casualty losses on their tax returns for the year <em>before</em> the disaster actually occurred.<a href="#_ftn1" name="_ftnref1">¹</a> This treatment is elective, so the taxpayer may choose to claim the casualty loss in the manner otherwise prescribed by IRC Section 165 (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8716">8716</a>).<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> An election to claim a deduction for the preceding year must be made by filing a return, an amended return, or a claim for refund clearly showing that the election has been made. In general, the return or claim should specify the date or dates of the disaster which gave rise to the loss, and the city, town, county, and state in which the property which was damaged or destroyed was located at the time of the disaster. An election for a loss resulting from a particular disaster occurring after December 31, 1971, must be made by the later of (1) the due date for filing the income tax return (without regard to any filing extensions) for the year in which the disaster actually occurred, or (2) the due date for filing the return (determined with regard to any filing extension) for the taxable year immediately preceding the year in which the disaster actually occurred. The election is irrevocable 90 days after the date on which it&rsquo;s made.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr><br /> <br /> If the due date (including extensions) for filing the taxpayer&rsquo;s prior year tax return has not expired, the taxpayer can claim the deduction when the taxpayer files that return. If the due date has passed, the taxpayer can file an amended return to reflect the casualty loss deduction on the prior year&rsquo;s tax return.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The special treatment described in this question applies to taxpayers who have sustained a loss:<br /> <p style="padding-left: 40px;">(1)&nbsp; Arising from a disaster in an area where the President of the United States determines that assistance is warranted by the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (or a successor act);</p><br /> <p style="padding-left: 40px;">(2)&nbsp; Occurring after December 31, 1971;</p><br /> <p style="padding-left: 40px;">(3)&nbsp; That otherwise constitutes a loss allowable under IRC Section 165(a) and the regulations.<a href="#_ftn4" name="_ftnref4">⁴</a></p><br /> A taxpayer is entitled to claim a loss under these provisions if the taxpayer&rsquo;s residence is located in a federally declared disaster area that has been declared unsafe for use as a residence because of the disaster, and the taxpayer is ordered to demolish or relocate the residence within 120 days after the area is declared to be a disaster area.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 165(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Temp. Treas. Reg. &sect; 1.165-11(e).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Temp. Treas. Reg. &sect;&nbsp;1.165-11(e).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Temp. Treas. Reg. &sect; 1.165-11(b).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect; 165(k).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A taxpayer who sustains a theft loss may take the deduction for the tax year in which the taxpayer discovers the loss, rather than the year in which the loss was sustained (as is the general rule for casualty losses).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The reasonable prospect of recovery doctrine (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8716">8716</a>) applies in the case of theft losses,<br /> so that the taxpayer will not be entitled to take a deduction if there is a claim for reimbursement against a third party that may fully or partially compensate the taxpayer for the theft loss, and there is a reasonable prospect that the taxpayer will recover these amounts.<a href="#_ftn3" name="_ftnref3">³</a> These rules do not apply to a theft loss discovered through a shortage in the inventories of a business.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The amount of the taxpayer&rsquo;s theft loss deduction is determined using the same method applicable to casualty loss deductions (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8713">8713</a>).<br /> <p style="padding-left: 40px;"><em>Example</em>: Denise purchased a watch for $15,000 in 2012. In 2015, the watch, which now has a fair market value of $13,500, is stolen. Denise does not discover that the watch is missing until 2016. Though the watch was insured against theft, the insurance company challenges its liability for the loss. Despite this challenge, Denise has a reasonable prospect of recovering from the insurance company in 2016. In 2017, Denise settles with the insurance company and receives $12,000 in insurance proceeds to cover the theft loss. Denise is not permitted to take a deduction in 2015 or 2016, but in 2017, she is permitted a theft loss deduction for $1,500. The computation is made as follows:</p><br /> <p style="padding-left: 40px;">Value of property immediately before theft................................................................... $13,500</p><br /> <p style="padding-left: 40px;">Less: value of property immediately after theft............................................................. $0</p><br /> <p style="padding-left: 40px;">Balance........................................................................................................................... $13,500</p><br /> <p style="padding-left: 40px;">Loss to be taken into account for purposes of Section 165(a)....................................... $13,500</p><br /> <p style="padding-left: 40px;">Less: insurance received in 2017.....................................................................................$12,000</p><br /> <p style="padding-left: 40px;">Deduction allowable for 2017 ........................................................................................ $1,500</p><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 165(h)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 165(e); Treas. Reg. &sect; 1.165-8(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect; 1.165-8(a)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect; 1.165-8(e).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Casualty and theft losses are deductible whether the loss relates to property held by the taxpayer (i) for use in a trade or business, (ii) for investment purposes or (iii) for use that is purely personal.<a href="#_ftn2" name="_ftnref2">²</a> However, if the property involved is not held for a business or profit-generating purpose, the amount of the deduction is limited as follows:<br /> <p style="padding-left: 40px;">(1)&nbsp; each loss is reduced by $100 and any insurance proceeds received (prior to 2010, the $100 limitation was $500);<a href="#_ftn3" name="_ftnref3">³</a> and</p><br /> <p style="padding-left: 40px;">(2)&nbsp; the aggregate of such adjusted losses is deductible only to the extent that it exceeds 10 percent of adjusted gross income.<a href="#_ftn4" name="_ftnref4">⁴</a></p><br /> If the taxpayer sustains more than one loss from a single casualty event, only one $100 reduction is made. Conversely, a separate reduction of $100 is made for losses from <em>each</em> casualty or theft event. The 10 percent limit applies to the <em>total</em> of all of the taxpayer&rsquo;s losses from all casualty events occurring in the same tax year.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> When casualty and theft losses exceed income for the tax year, the excess is considered a net operating loss and may be carried back to offset income in prior years and carried forward to offset income of future years under the net operating loss provisions. All casualty and theft losses qualify even though the property is personal.<br /> <br /> As discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8713">8713</a>, the amount of the loss which can be deducted above the $100 floor is limited to the lesser of (1) the difference between the fair market value of the property immediately before the casualty and the fair market value immediately after the casualty, or (2) the adjusted basis of the property.<a href="#_ftn6" name="_ftnref6">⁶</a>&nbsp;(For a description of what the IRS considers to constitute &ldquo;immediately after,&rdquo; <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8713">8713</a>.) This amount is further reduced by any insurance or other indemnification received. In addition, as discussed above, such loss is deductible only to the extent it exceeds 10 percent of adjusted gross income.<br /> <p style="padding-left: 40px;"><em>Example 1:</em> In June, Pete and Karen discovered their house had been burglarized. Their loss after insurance reimbursement was $2,000. Their adjusted gross income for the tax year was $29,500. To determine their theft loss deduction, Pete and Karen must first apply the $100 rule and then the 10 percent rule. Their theft loss deduction is calculated as follows:</p><br /> <p style="padding-left: 40px;">1 Amount of loss............................................................................................................................... $2,000</p><br /> <p style="padding-left: 40px;">2 Subtract $100.................................................................................................................................... (100)</p><br /> <p style="padding-left: 40px;">3 Loss after $100 rule............................................................................................................................ 1,900</p><br /> <p style="padding-left: 40px;">4 Subtract 10 percent of $29,500 (AGI)............................................................................................... (2,950)</p><br /> <p style="padding-left: 40px;">Theft loss deduction................................................................................................................................ -0-</p><br /> Pete and Karen will not be allowed a theft loss deduction because their loss ($1,900) is less than<br /> 10 percent of their AGI.<br /> <p style="padding-left: 40px;"><em>Example 2:</em> Cathy and Bernardo owned a group of apartment buildings that were damaged by flooding. Before the flood, the adjusted basis in the apartment buildings was $672,000. The fair market value of the property immediately prior to the flood was $2 million, and immediately after the flood was $750,000. Cathy and Bernardo received $767,000 from insurance coverage. Although the $1,250,000 decline in market value far exceeded the insurance recovery, no casualty loss deduction is allowable, since the insurance proceeds exceeded the adjusted basis in the property.<a href="#_ftn7" name="_ftnref7">⁷</a></p><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 165(h)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 165.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect; 165(h)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect; 165(h)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRS Publication 547.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Treas. Reg. &sect; 1.165-7(b)(1).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; <em><em>See</em> Lafavre v. Commissioner</em>, TC Memo 2000-297.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Generally, a taxpayer is required to claim a casualty loss deduction for the tax year in which the loss was sustained. A taxpayer is considered to have sustained a casualty loss in the year in which the loss occurs as evidenced by closed and completed transactions and as fixed by identifiable events occurring in the year.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The fact that a taxpayer is unable to determine the extent of the damage caused or the cost of repairing the damage is insufficient to allow the taxpayer to carry a casualty loss deduction into a succeeding tax year. The Tax Court has determined that an expert appraisal is sufficient to determine the level of damage sustained at the time the casualty loss occurred even if the extent of the damage was not immediately apparent.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Despite this, the reasonable prospect of recovery doctrine will actually prohibit a taxpayer from claiming a casualty loss in the year the casualty occurs if the taxpayer has a claim for reimbursement with respect to which the taxpayer may reasonably be expected to recover all or a portion of the casualty loss.<a href="#_ftn4" name="_ftnref4">⁴</a> The portion of the casualty loss to which the potential for reimbursement relates will be disallowed until it can be ascertained &ldquo;with reasonable certainty&rdquo; whether or not the reimbursement will be received.<br /> <p style="padding-left: 40px;"><em>Example</em>: Brent&rsquo;s cottage, which had an adjusted basis of $100,000, is completely destroyed by a fire in 2016. His only claim for reimbursement was an insurance claim for $80,000, which he settled in 2017. Brent sustained a loss of $20,000 for 2017. If the cottage was destroyed due to the negligence of a third party, and there is a reasonable prospect that the third party can be held liable for the entire amount of the damage, Brent cannot take a loss deduction until it is determined whether or not he can recover damages from that third party.<a href="#_ftn5" name="_ftnref5">⁵</a></p><br /> Whether a &ldquo;reasonable prospect of recovery&rdquo; exists is a question of fact that is determined based on an examination of all of the facts and circumstances of the particular loss being claimed.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> If a taxpayer takes a casualty loss deduction for a loss sustained in one year, but receives reimbursement for that loss in a subsequent tax year, the taxpayer is not required to file an amended return for the year in which the deduction was erroneously claimed. Instead, the taxpayer must include the reimbursed amount in gross income for the year it is received.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> A special rule applies in the case of casualty losses sustained in a federally declared disaster area. If the taxpayer&rsquo;s casualty loss was sustained in a disaster area, the taxpayer may elect to take the casualty loss deduction in the year immediately preceding the year in which the loss was sustained.<a href="#_ftn8" name="_ftnref8">⁸</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8719">8719</a> for a detailed discussion of the treatment of casualty losses that occur in a disaster area.<br /> <br /> The reasonable prospect of recovery doctrine also applies in the case of theft losses (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8712">8712</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 165(h)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect; 1.165-1(d)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em><em>See</em> Allen v. Commissioner</em>, 49 TCM 238 (1984).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect; 1.165-1(d)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect; 1.165-1(d)(2)(ii).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Treas. Reg. &sect; 1.165-1(d)(2)(i).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Treas. Reg. &sect; 1.165-1(d)(2)(iii).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect; 165(i); Treas. Reg. &sect; 1.165-1(d)(1).<br /> <br /> </div></div><br />