Claiming Tax Deductions for Losses on Damaged Property
In calculating the amount of tax deductible for losses on damaged property, which was caused by unforeseen events like hurricanes, tornadoes, earthquakes, fires or similar catastrophes, the values of the additions erected on the entire property, i.e. building, fence, trees, decks, and so forth are treated as a single loss.
There are two values considered for calculating the amount of deductible loss and the smaller of these two values shall be used:
(1) The Fair Market Value (FMV) after the catastrophe
Basically, the context of fair market value means it is the price which a buyer of the property would be willing to pay while knowing the conditions surrounding the property. Neither the buyer nor the seller is looking for a property to sell or buy immediately after the untoward event.
(2) The adjusted basis of the property, which is the original cost plus the add-ons or improvements, minus all the value of depreciations and / or depletions of the property.
A taxpayer owned a house and lot, which he had bought a few years ago at a price value of $115,000, and for which he spent an additional $65,000 for some repairs on the improvement and landscaping .
Unfortunately, a hurricane destroyed the improvements, but the insurance company reimbursed the taxpayer the amount of $100,000.
Due to the increasing number of hurricanes that had hit the region, the FMV of similar residential properties had dropped to $175,000 from a FMV of $300,000 before the hurricane had taken place. The taxpayer’s AGI for the year is $60,000.
Calculating the amount of loss from property damage is as follows:
- Adjusted basis of the property ($115,000 + $65,000) - $180,000
- FMV before the hurricane - $300,000
- FMV after the hurricane - $175,000
- Loss Due to Decline in FMV - $125,000
Before proceeding to the next steps, it should be noted that the value to be used as a basis for calculating the amount of tax deduction is the loss due to the decline in FMV, which is $125,000.The latter has a smaller value than the adjusted basis of the property worth $180,000.
Determining the amount of claim for tax deduction:
- Loss due to decline in FMV - $125,000
Amount of insurance – ($100,000)
- Loss after insurance - $25,000
- $100 personal deduction limit – ($100)
- Loss after the $100 rule - $24,900
- 10% of $60,000 AGI – ($6,000)
- Casualty Loss Deduction - $18,900