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The IRS generally prohibits taxpayers from claiming a deduction for losses they incur on personal property. However, if your loss is the direct result of a casualty event, such as severe weather or a sudden and unavoidable accident, part of your loss is deductible. Calculating your deductible loss requires assessing the Fair Market Value (FMV) of your property immediately before and after the casualty. In many cases, the decrease in FMV determines how much you can deduct.
Calculate the property’s FMV immediately prior to the casualty event. The FMV of your property is always equal to its market price, which is the amount a buyer is willing to pay for the property in its current condition. Therefore, you must assess the property’s FMV using appraisals or the sales price of similar property in comparable condition. For example, if a hurricane causes damage to your car, a reasonable FMV is the price that a reputable used-car guide values it at given its age, mileage and running condition.
Calculate FMV immediately after casualty event. In most cases, the FMV of your property after the casualty event is equal to the FMV immediately before the event, less the cost of the repairs necessary to restore it to its original condition. Therefore, if the used-car guide estimates your car’s value at $10,000 and the storm requires you to replace a broken windshield for $1,500; the car’s FMV after the casualty event is $8,500. However, if the car is completely destroyed by the storm, your FMV is zero.
Compute the property’s adjusted basis. The basis of your property is equal to the price you pay to acquire or construct it, plus the cost of any permanent improvements you make prior to the casualty event. So if you purchase the car for $15,000 and later install a television and DVD player in the backseat for your children for $1,000; your adjusted basis is $16,000.
Choose the lower of the property’s decrease in FMV and its adjusted basis. The IRS requires that you calculate your deductible casualty loss using the lower of the decrease in FMV that results from the casualty or your adjusted basis in the property. To illustrate, your adjusted basis for the car is $15,000 and the decrease in its FMV is $1,500. Therefore, list $1,500 as your casualty loss.
If you plan on claiming a casualty loss deduction on a personal tax return, the IRS requires that you attach Form 4684 to it.
Publication 584 includes schedules that are helpful for calculating your casualty loss on various types of property.
You must reduce the reduction or loss of FMV for the amount of reimbursements you receive from an insurance company or other third-party.
The decrease in your property’s FMV is not the amount you can deduct. The IRS requires you to reduce the total loss from each casualty event by $100, and then again by 10 percent of your adjusted gross income.
Items you will need
- Schedules 1 through 20 of IRS Publication 584
- Estimates of property repair costs