Question

For the following independent situation for an individual taxpayer. Item Use (Personal or Business) Business Basis $25,000 FMV before the casualty $17,000 FMV after the casualty None Adjusted gross income (before any allowable casualty loss) $50,000 Insurance proceeds $10,000

The starting point for the calculation of the loss deduction is:

The amount of the deductible casualty loss is:

Answer 1

Determination of Loss –

The loss you incurred is calculated by subtracting insurance proceeds or other reimbursements received or expected to receive from the lower of :-

(1) the decrease in the fair market value of the property as a result of the casualty, or

(2) your adjusted basis in the property prior to the event.

Decrease in Fair Market Value –

The decrease in fair market value is calculated as the difference between the property’s value immediately prior to and immediately after the event.

Adjusted Basis –

Adjusted basis is determined as the amount originally paid for the property increased by capital expenditures and reduced by depreciation deducted throughout the years.

Adjusted Gross Income Limitation –

Another hurdle to clear is the 10% of Adjusted Gross Income (AGI) limitation. The casualty loss, as determined above, is deductible only to the extent it exceeds 10% of your AGI for the year of loss.

Calculations are depicted in the image attached.