Question

.     In 20X6, Wood’s residence had an adjusted basis of $150,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later that same year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood’s 20X6 adjusted gross income was $60,000 and he did not have any casualty gains. What total amount can Wood deduct as a 20X6 itemized deduction for the casualty loss, after the application of the threshold limitations?

Answer 1

Casualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to property's basis. Therefore the casualty losses in this case of $175,000 will be limited to $150,000 (i.e. property's adjuested basis). Casualty losses are reduced by the amount of any insurance recovery (i.e casualty losses will reduce to $20,000 after reduction of $130,000 insurance recovery from adjusted basis of $150,000).

Further each individual loss is reduced by $100 bringing this loss to $19,900 ($20,000 - $100).

Finally, the remaining total amount of all casualty losses are deductible only to the extent that amount exceeds 10% of AGI (i.e. 10% of $60,000 = $6,000)

Itemized deduction for Casualty loss = $19,900 - $6,000 = $13,900

Hence, Wood can deduct $13,900 as a 20X6 itemized deduction for the casualty loss, after the application of the threshold limitations.