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Chapter 26. Nonbusiness Casualty and Theft Losses

Introduction

This chapter discusses how you treat casualty and theft losses for tax
purposes when the losses are personal and not business related.

As a result of hurricanes, earthquakes, tornadoes, fires, vandalism, car
accidents, floods, and similar events, many people suffer damage to their
property. When property is damaged or destroyed by such an event, it is
called a casualty. This chapter will cover the following types of losses:

∙  Loss on deposits,

∙  Casualty loss, including disasters, and

∙  Theft loss.

This chapter will also provide information on what you should do once you
determine you have a casualty or theft loss. The following information is
provided in this chapter:

∙  How to compute the amount of your loss,

∙  When to deduct your loss subject to certain limits,

∙  How to treat insurance and other reimbursements you receive for casualty
   losses, and

∙  Which form to use to report your loss.

How to claim a loss. You must file Form 1040 and itemize your deductions
on Schedule A (Form 1040) to be able to claim a casualty or theft loss of
nonbusiness property. You cannot claim these losses if you file Form 1040A
or Form 1040EZ.

Note. The overall limit on itemized deductions discussed in Chapter 21 does
not apply to casualty or theft losses.

Publication 584 is available to help you make a list of your damaged goods and
figure your loss. That publication can serve as an inventory of your personal
goods. It includes schedules to help you figure the loss on your home and its
contents, and on your motor vehicles.

Deduction on casualty and theft losses is limited. You must reduce each
casualty or theft loss on nonbusiness property by $100. You must further
reduce the total of your casualty and theft losses for the year on nonbusiness
property by 10% of your adjusted gross income. If these amounts are more than
your losses, you do not have a casualty or theft loss deduction.

For information on a casualty, theft, or condemnation concerning business or
income-producing property, see Chapter 26 in Publication 334, Tax Guide for
Small Business.

For information on a condemnation of your home, see Involuntary Conversions,
in Publication 544.

Related publications and forms.

This chapter refers to several forms and publications that you may need.
The list of forms does not include Forms 1040, 1040A, and 1040EZ. For more
information, you may want to order the following:

    Publication 544, Sales and Other Dispositions of Assets

    Publication 547, Nonbusiness Disasters, Casualties, and Thefts

    Publication 550, Investment Income and Expenses

    Publication 551, Basis of Assets

    Publication 584, Nonbusiness Disaster, Casualty, and Theft Workbook

    Form 4684, Casualties and Thefts

Loss on Deposits

A loss on deposits can occur when a bank, credit union, or other financial
institution becomes insolvent or bankrupt. If you incurred such a loss, you
may be able to choose how to deduct it. You have 3 choices of how to deduct
the loss:

1)  As a nonbusiness bad debt,

2)  As a casualty loss, or

3)  As an ordinary loss.

Note. You cannot choose (2) or (3) if you are at least a 1% owner, or an
officer of the financial institution, or related to that owner or officer.
For the definition of "related," see Related Party Transactions in Publication
550.

Choice of loss deduction. If you qualify to choose the kind of deduction as
explained above, the following information may help you choose the one best
for you.

Nonbusiness bad debt. A nonbusiness bad debt is deducted as a short-term
capital loss on Schedule D (Form 1040). The capital loss that can be deducted
after off-setting capital gains is limited to $3,000 ($1,500 if married filing
separately) for each year. For more details, see Nonbusiness Bad Debt in
Publication 550.

Casualty loss. A casualty loss deduction has no maximum limit. But in figuring
the deduction, the loss is reduced by $100 and 10% of adjusted gross income,
as explained later. A casualty loss deduction cannot be taken unless you
itemize deductions on Schedule A (Form 1040).

Ordinary loss. An ordinary loss deduction for a loss on deposits at a
particular financial institution is limited each year to $20,000 ($10,000 if
married filing separately) reduced by any expected state insurance proceeds.
Further, the deduction is taken as a miscellaneous itemized deduction and is
limited to amounts in excess of 2% of adjusted gross income for that year.

Note. You cannot choose the ordinary loss deduction if any part of the
deposits related to the loss is federally insured (example - FDIC).

When to choose. You can choose to deduct a loss on deposits as a casualty or
an ordinary loss for any year in which you can reasonably estimate how much of
your deposits you have lost in an insolvent or bankrupt financial institution.
The choice is generally made on the return you filed for that year. Once you
treat the loss as a casualty or ordinary loss, you cannot treat the same
amount of the loss as a nonbusiness bad debt when it actually becomes
worthless. Also, the choice applies to all your losses on deposits for
the year in the particular financial institution.

If you do not make a choice, you must wait until the actual loss is determined
before you can deduct the loss as a nonbusiness bad debt. Once you make this
choice, you cannot change it without permission from the Internal Revenue
Service.

How to report. The kind of deduction you choose for loss on deposits
determines how you report your loss. If you choose to deduct the loss as a:

∙  Nonbusiness bad debt - report on Schedule D (Form 1040), Part 1, line
   1d.

∙  Casualty loss - report the loss on Form 4684 first and then on Schedule
   A (Form 1040), line 17, or

∙  Ordinary loss - report the loss on Schedule A (Form 1040), line 20.

Get the Form 1040 instructions for more information.

Deducted loss recovered. If you recover an amount you already deducted in an
earlier year as a loss, you may have to include the amount recovered in your
income for the year of receipt. If any part of the original deduction did not
reduce your tax in the earlier year, you do not have to include that part
of the recovery in your income. For more information on the taxability, see
Recoveries in Publication 525.

Casualty

A casualty is the damage, destruction, or loss of property resulting from an
identifiable event that is sudden, unexpected, or unusual.

∙  A sudden event is one that is swift, not gradual or progressive.

∙  An unexpected event is one that is ordinarily unanticipated and
   unintended.

∙  An unusual event is one that is not a day-to-day occurrence and that is
   not typical of the activity in which you were engaged.

A casualty can also include a government-ordered demolition or relocation of
a home unsafe to use because of a disaster. For more information, see Disaster
Area Losses in Publication 547.

Condemnations. You may have a gain or loss when your property is condemned or
disposed of under the threat of condemnation and you receive other property
or money in payment. Condemnation is the process by which private property
is legally taken, without the owner's consent, for public use by the federal
government, a state government, or a political subdivision in exchange for a
reasonable amount of money or property. For information on how to figure a
gain or loss from a condemnation, see Publication 544.

Casualty losses. Deductible casualty losses may result from a number of
different causes, including:

   Earthquakes

   Hurricanes

   Tornadoes

   Floods

   Storms

   Volcanic eruptions

   Shipwrecks

   Mine cave-ins

   Sonic boom

   Vandalism

   Fires. If you set the fire, you cannot deduct the resulting loss.

   Car accidents. The loss from an accident to your car is not a casualty
   loss if your willful negligence or willful act caused the accident, or if
   it was caused by the willful act or willful negligence of someone acting
   for you.

   Other accidents. A loss due to the accidental breakage of articles such
   as glassware or china under normal conditions is not a casualty loss.
   Neither is a loss due to damage done by a family pet.

Nondeductible losses. There is no casualty loss deduction if the damage or
destruction is caused by:

   Termites or moths.

   Disease. The damage or destruction of trees, shrubs, or other plants by
   a fungus, disease, insects, worms, or similar pests is not a deductible
   casualty loss. But, a sudden, unexpected, or unusual infestation by
   beetles or other insects may result in a casualty loss. If trees and
   shrubs are damaged by a storm, flood, or fire, the loss is a casualty.

   Progressive deterioration. If a steadily operating cause or a normal
   process damages your property, it is not considered a casualty. Thus, the
   steady weakening of a building due to normal wind and weather conditions
   is not a casualty. The rust and water damage to rugs and drapes caused by
   the bursting of a water heater qualifies as a casualty. The deterioration
   and damage to the water heater itself does not qualify.

   Drought. When drought causes damage through progressive deterioration, it
   is not a sudden event.

Theft

A theft is the unlawful taking and removing of money or property with the
intent to deprive the owner of it. It includes, but is not limited to,
larceny, robbery, and embezzlement.

If money or property is taken as the result of extortion, kidnapping, threats,
or blackmail, it may also be a theft. In these instances, you need only to
show that the taking of your property was illegal under the law of the state
where it occurred, and that it was done with criminal intent.

Mislaid or lost property. The simple disappearance of money or property is
not a theft. However, an accidental loss or disappearance of property may
qualify as a casualty, if it results from an identifiable event that is
sudden, unexpected, and unusual.

Example. A car door is accidentally slammed on your hand, breaking the setting
of your diamond ring. The diamond falls from the ring and is never found. The
loss of the diamond is a casualty.

Proof of Loss

To take a deduction for a casualty or theft loss, you must be able to show
that there was actually a casualty or theft, and you must be able to support
the amount you take as a deduction.

For a casualty loss, you should show:

∙  The type of casualty (car accident, fire, storm, etc.) and when it
   occurred,

∙  That the loss was a direct result of the casualty, and

∙  That you were the owner of the property or, if you leased the property
   from someone else, that you were contractually liable to the owner for
   the damage.

For a theft loss, you should show:

∙  When you discovered that your property was missing,

∙  That your property was actually stolen, and

∙  That you were the owner of the property.

Amount of Loss

A casualty or theft loss is figured by subtracting any insurance or other
reimbursement you receive or expect to receive from the smaller of the
following two amounts:

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

2)  Your adjusted basis in the property before the casualty or theft.

The decrease in fair market value is the difference between the property's
value immediately before and immediately after the casualty or theft.

Fair market value (FMV). FMV is the price for which you could sell your
property to a willing buyer, when neither of you have to sell or buy and
both of you know all the relevant facts.

Adjusted basis. Adjusted basis is your basis (usually cost) increased or
decreased by various events, such as improvements and casualty losses.

Theft. The FMV of property immediately after a theft is considered to be
zero, since you no longer have the property. A theft loss is figured using
the smaller of the stolen property's FMV or adjusted basis.

Example. Several years ago, you purchased silver dollars at face value for
$150. This is your adjusted basis in the property. Your silver dollars were
stolen this year. The FMV of the coins was $1,000 when stolen, and they were
not covered by insurance. Your theft loss is $150.

Recovered property. If you get your stolen property back, your loss is
measured like a casualty loss from vandalism. That is, you must consider the
actual FMV of the property when you get it back. Your loss is figured using
the smaller of:

∙  The decrease in the FMV of the property from the time it was stolen until
   the time it is recovered, or

∙  Your adjusted basis in the property.

Leased property. If you are liable for casualty damage to property you lease,
your loss is the amount you must pay to repair the property.

Business or income-producing property. If you have business or income-
producing property, and it is completely destroyed or lost because of a
casualty or theft, your loss is:

                  Your adjusted basis in the property

                                 MINUS

                           Any salvage value

                                 MINUS

                  Any insurance or other reimbursement
                    you receive or expect to receive

The decrease in FMV is not considered. See Chapter 26 in Publication 334.

Separate computations. If more than one item of property was involved in a
single casualty or theft, generally, you must figure the loss on each item
separately. Then combine the losses to determine the total loss from that
casualty or theft.

Exception for real property. In figuring a casualty loss on nonbusiness real
property, the entire property (including any improvements, such as buildings,
trees, and shrubs) is treated as one item. The loss is figured using the
smaller of:

∙  The decrease in FMV of the entire property, or

∙  The adjusted basis of the entire property.

Decrease in fair market value. To figure the decrease in FMV because of a
casualty or theft, you must make a determination of the actual price you could
have sold your property for immediately before and immediately after the loss.
An appraisal is the best way to make this determination.

Items not to be considered. You generally should not consider the following
items when attempting to establish the FMV of your property.

Sentimental value. Do not consider sentimental value when determining your
loss. If a family portrait, heirloom, or keepsake is damaged, destroyed, or
stolen, you must base your loss only on its actual market value.

General decline in market value. A decrease in the value of your property
because it is in or near an area that suffered a casualty, or that might
again suffer a casualty, is not a casualty loss. You have such a loss only
for actual casualty damage to your property. However, if your home is in a
federally declared disaster area and you are ordered by your state or local
government to demolish or relocate the home, you might be able to deduct a
casualty loss. See Disaster Area Losses in Publication 547.

The cost of protection. The cost of protecting your property against a
casualty or theft is not part of a casualty or theft loss. For example, you
cannot deduct what you spend on insurance or to board up your house against a
storm. These expenses are deductible only by businesses as business expenses.

If you make permanent improvements to your property to protect it against a
casualty or theft, the cost should be added to your basis in the property.
An example would be the cost of a dike to prevent flooding.

Related expenses. The incidental expenses you have due to a casualty or
theft, such as expenses for the treatment of personal injuries, for temporary
housing, or for a rental car, are not part of your casualty or theft loss.

Repair and replacement costs. The cost of repairing damaged property or of
replacing stolen or destroyed property is not part of a casualty or theft
loss. Neither is the cost of cleaning up after a casualty.

Example. You bought a new chair 4 years ago for $300. In April, a fire
completely destroyed the chair. You estimated that it would cost $500 to
replace it. If you had sold the chair before the fire, you estimate that you
could have received only $100 for it because it was 4 years old. The chair was
not insured. Your loss is $100, the FMV of the chair before the fire. It is
not $500, the replacement value.

Indication of decrease in fair market value. You can use the cost of cleaning
up or of making repairs after a casualty as a measure of the decrease in FMV
if you meet all the following conditions.

1)  The repairs are necessary to bring the property back to its condition
    before the casualty.

2)  The amount spent for repairs is not excessive.

3)  The repairs take care of the damage only.

4)  The value of the property after the repairs is not, due to the repairs,
    more than the value of the property before the casualty.

Restoration of landscaping. The cost of restoring landscaping to its original
condition after a casualty may be an indication of the decrease in FMV. You
may be able to measure your loss by what you spend on the following:

1)  Removing destroyed or damaged trees and shrubs minus any salvage you
    receive,

2)  Pruning and other measures taken to preserve damaged trees and shrubs,
    and

3)  Replanting necessary to restore the property to its approximate value
    before the casualty.

Sources of information. It is often difficult to value your property before
and after the casualty or theft. The following sources will be helpful in
establishing these values.

Photographs. Photographs taken after a casualty will be helpful in
establishing the condition and value of the property after it was damaged.

The costs of photographs obtained for this purpose are not a part of the loss,
but can be claimed as a miscellaneous deduction subject to the 2% of adjusted
gross income limit on line 20, Schedule A (Form 1040). The cost of the
photographs is an expense of determining your tax liability.

Cars. Books issued by various automobile organizations may be useful in
figuring the value of your car, if your car is listed in the books. You can
use the books' retail values and modify them by such factors as mileage and
the condition of your car to figure its value. The prices are not "official,"
but they may be useful in determining value and suggesting relative prices for
comparison with current sales and offerings in your area. If your car is not
listed in the books, you determine its value from other sources. A dealer's
offer for your car as a trade-in on a new car is not usually a measure of
its true value.

Appraisals. The difference between the FMV of the property immediately before
a casualty or theft and immediately afterwards should be determined by a
competent appraiser. The appraiser must recognize the effects of any general
market decline that may occur along with the casualty so that any deduction
is limited to the actual loss resulting from damage to the property.

The appraiser should be reliable and experienced. Several factors are
important in evaluating the accuracy of an appraisal:

∙  The appraiser's familiarity with your property before and after the
   casualty or theft,

∙  The appraiser's knowledge of sales of comparable property in the area,

∙  The appraiser's knowledge of conditions in the area of the casualty, and

∙  The appraiser's method of appraisal.

Appraisal fees. You can deduct your appraisal fees as a miscellaneous
deduction subject to the 2% of adjusted gross income limit on line 20,
Schedule A (Form 1040). The appraisal fee is an expense of determining
your tax liability. It is not a part of the casualty loss.

Records. It is important that you have records that will prove your deduction.
If you do not have the actual records to support your deduction, you can use
other satisfactory evidence that is sufficient to establish your deduction.

Figuring the Loss

Generally, you must figure your loss separately for each individual item
stolen, damaged, or destroyed. However, for nonbusiness real property, an
entire piece of real estate is considered one item.

Real property. Real property is land, the plants and trees that grow on land,
and the buildings and other structures that are placed on land. In figuring
a loss to real property you own for personal use, all improvements, such as
buildings and ornamental trees, are considered together. The loss is the
smaller of the decrease in the fair market value of the entire property or
its adjusted basis.

Example. You bought your home a few years ago. You paid $50,000 ($10,000 for
the land and $40,000 for the house). You also spent $2,000 for landscaping.
This year your home was totally destroyed by fire. The fire also damaged the
shrubbery and trees in your yard. The fire was your only casualty or theft
loss this year. Competent appraisers valued the property as a whole at $75,000
before the fire, but only $15,000 after the fire. (The loss to your household
furnishings is not shown in this example but would be figured separately, as
explained later.) You figure your casualty loss deduction as follows:

    1) Adjusted basis of the entire property
      (cost of land, building, and landscaping) ...   $52,000
                                                     ==========
    2) FMV of entire property before fire .........   $75,000

    3) FMV of entire property after fire ..........    15,000
                                                     __________
    4) Decrease in FMV of entire property .........   $60,000
                                                     ==========
    5) Amount of loss
       (smaller of 1 or 4) ........................   $52,000

Personal property. Personal property is generally any property that is not
real property. If your personal property is stolen or is damaged or destroyed
by a casualty, you must figure your loss separately for each item of property.
The loss is the smaller of the decrease in the FMV of the property or its
adjusted basis.

Example. A fire in your home completely destroyed an upholstered chair, an
oriental rug, and an antique table. You did not have fire insurance to cover
your loss. (This was the only casualty or theft you had during the year.) The
chair cost you $750, and you established that it had a FMV of $500 just before
the fire. The rug cost you $3,000 and had a FMV of $2,500 just before the
fire. You bought the table at an auction for $100, before discovering it was
an antique. It had been appraised at $900 before the fire. You figure your
loss on each of these items as follows:

                                         Chair     Rug     Table
    1) Basis (cost) .................    $750     $3,000    $100
                                      ===========================
    2) FMV before fire ..............    $500     $2,500    $900

    3) FMV after fire ...............     ─0─        ─0─     ─0─
                                      ___________________________
    4) Decrease in FMV ..............    $500     $2,500    $900
                                      ===========================
    5) Loss (smaller of 1 or 4) .....    $500     $2,500    $100
                                      ===========================
    6) Total loss ...................                     $3,100
                                                       ==========

Both real and personal property. When a casualty involves both real and
personal property, you must figure the loss separately for each type of
property, as shown in the previous examples. But you apply a single $100
reduction to the total loss. Then you apply the 10% rule. Both are explained
later.

Property used partly for business and partly for personal purposes. When
property is used partly for personal (nonbusiness) purposes and partly for
business or income-producing purposes, the casualty or theft loss deduction
must be figured separately for the nonbusiness portion and for the business
portion. You must figure each loss separately because the losses attributed
to these two uses are figured in two different ways. The $100 rule and the
10% rule (explained later) apply only to the casualty or theft loss on the
nonbusiness portion of the property.

Insurance and Other Reimbursements

If your property is covered by insurance, you should file a timely insurance
claim for reimbursement of a loss. Otherwise, you cannot deduct this loss as
a casualty or theft loss. But the portion of the loss not covered by insurance
(for example, a deductible) is not subject to this rule.

Example. You have a car insurance policy with a $500 deductible. Because the
first $500 of an auto collision is not covered by insurance, the $500 would be
deductible (subject to the $100 and 10% rules discussed later). This is true
even if you do not file an insurance claim since your insurance policy would
never have reimbursed you for it.

Reduction of loss. If you receive insurance or another type of reimbursement,
you must subtract the reimbursement when you figure your loss. You do not have
a casualty or theft loss to the extent you are reimbursed.

If you expect to be reimbursed, but have not yet received payment, you must
still subtract the expected reimbursement. See When to Deduct a Loss, later.

Gain from reimbursement. If your reimbursement is more than your basis in the
property, you have a gain. This is true even if the decrease in the FMV of the
property is more than its basis. If you have a gain, you may have to pay tax
on it, or you may be able to postpone reporting the gain.

See Publication 547 for more information on how to treat a gain from the
reimbursement for a casualty or theft.

Other reimbursements. Insurance is the most common way to be reimbursed for
a casualty or theft loss. But you may be reimbursed in some other way. The
following items are considered reimbursements:

∙  The forgiven part (the part you do not have to pay back) of a federal
   disaster loan under the Disaster Relief and Emergency Assistance Act,

∙  The repayment and cost of repairs by the person who leases your property,

∙  The court awards for damages for a casualty or theft loss (the amount you
   are able to collect) minus lawyers' fees and other necessary expenses,

∙  The repairs, restoration, or cleanup provided by relief agencies, and

∙  Bonding company payment for a theft loss.

Payments not reimbursements. Insurance, grants, gifts, and other payments you
receive to help you after a casualty are considered reimbursement only if they
are specifically designated to repair or replace your property. If the money
you receive is designated for other purposes, or if there are no conditions on
how you have to use it, the money is not a reimbursement even if you use it to
restore your property.

Payments for living costs. If an insurance company pays you for any of your
living expenses after you lose the use of your home because of a casualty, the
insurance payments are not considered a reimbursement. They do not reduce your
casualty loss.

You must report as income, insurance payments covering your normal living
expenses. However, the part of insurance payments that compensates you for
a temporary increase in the living expenses you and your family have during
this period does not have to be reported as income. The same rule applies to
insurance payments for living expenses if you are denied access to your home
by government authorities due to a casualty or the threat of a casualty. The
increase in your living expenses is the excess of your actual living expenses
over your normal living expenses.

Do not include in income the payment you received for your extra expenses
for renting suitable housing and for transportation, food, utilities, and
miscellaneous services during the period you are unable to use your home
because of the casualty.

Example. As a result of a fire, you vacated your apartment for a month and
moved to a motel. You normally pay $525 a month rent. None was charged for
the month the apartment was vacated. Your motel rent for this month was $1,200.
You received $1,100 reimbursement from your insurance company for rental
expenses.

The part of the insurance payment that reimburses you for the temporary
increase of your actual rent over your normal rent is $675 ($1,200 - $525).
You do not include the $675 in income. But you do include in income the rest
of the insurance received, $425 ($1,100 - $675).

Disaster relief. Food, medical supplies, and other forms of assistance you
receive do not reduce your casualty loss unless they are replacements for lost
or destroyed property. These items are not taxable income to you.

Deduction Limits

After you have figured your casualty or theft loss and subtracted any
reimbursements, you must figure how much of the loss you can deduct. If your
loss was to property you had for your own or your family's personal use, there
are two limits on the amount you can deduct for your casualty or theft loss:

1)  You must reduce each loss by $100.

2)  You must further reduce your loss by 10% of your adjusted gross income
    (line 32, Form 1040).

$100 Rule. A single $100 reduction applies to each individual casualty or
theft, no matter how many pieces of property are involved. This rule applies
after all reimbursements have been subtracted from your total casualty or
theft loss.

Single event. Generally, events closely related in origin are considered a
single casualty or theft. It is a single casualty when the damage is from two
or more closely related causes, such as wind and flood damage caused by the
same storm. A single casualty may also damage two or more widely separated
pieces of property, such as a hail storm that damages both your home and your
car parked downtown.

More than one loss. If you have more than one casualty or theft loss during
the tax year, you must reduce each loss by $100.

Example. Your family car was damaged in an accident in January. Your loss
after the insurance reimbursement was $75. In February, your car was damaged
in another accident. This time your loss after the insurance reimbursement
was $90. The $100 rule must be applied to each separate casualty loss. Since
neither accident resulted in a loss of over $100, you are not entitled to any
deduction for these accidents.

10% Rule. You must reduce the total of all your casualty or theft losses by
10% of your adjusted gross income (line 32, Form 1040). Apply this rule after
you reduce each loss by any reimbursements and $100. If you had more than one
casualty or theft loss during the year, this 10% limit applies to the total of
all your losses after each was reduced. If you have casualty or theft gains,
see Gains and losses, later in this discussion.

Example. In June, you discovered that your house had been robbed. Your loss
after insurance reimbursement was $2,000. Your adjusted gross income is
$29,500. You first apply the $100 rule and then the 10% rule. Your theft
loss is figured as follows:

    1. Loss after insurance ........................    $2,000

    2. Subtract $100 ...............................       100
                                                      __________
    3. Loss after $100 rule ........................    $1,900
                                                      ==========
    4. Subtract 10% of $29,500 AGI .................     2,950
                                                      __________
    5. Theft loss deduction ........................       ─0─
                                                      ==========

When you apply the 10% rule, you find you do not have a casualty or theft loss
deduction because your loss ($1,900) is less than 10% of your adjusted gross
income ($2,950).

Example. In March, you had a car accident that totally destroyed your car.
You did not have collision insurance on your car, so you did not receive any
insurance reimbursement. Your loss on the car was $1,200. In November, you had
a fire that damaged your basement and totally destroyed the furniture, washer,
dryer, and other items you had stored there. Your loss on the basement items
after reimbursement was $1,700. Your adjusted gross income is $25,000. You
figure your casualty loss deduction as follows:

                                           Car        Basement
    1. Loss .........................    $1,200      $  1,700
    2. Subtract $100 per incident ...       100           100
                                     ___________ _____________
    3. Loss after $100 rule .........    $1,100      $  1,600
                                     =========== =============
    4. Total loss .............................      $  2,700
    5. Subtract 10% of $25,000 AGI ............         2,500
                                                 _____________
    6. Casualty loss deduction ................      $    200
                                                 =============

Gains and losses. If you had both gains and losses from casualties or thefts
to nonbusiness property, special rules apply. If your total gains are less
than your total losses, only the excess losses are subject to the 10% rule.

However, if your total gains are more than your total losses, the difference
(gains minus losses) will be treated as capital gain on Schedule D (Form
1040). None of the losses will be subject to the 10% rule.

For more detailed explanations and examples, get Publication 547.

When to Deduct a Loss

A casualty usually is apparent when it happens. A theft may not be discovered
until later. This affects the year in which you may deduct a casualty or a
theft loss.

Casualty losses. Generally, you may deduct casualty losses only in the tax
year in which the casualty occurred. This is true even if the damaged property
is not repaired or replaced until the next year.

Loss on deposits. When you deduct a loss on deposits in an insolvent or
bankrupt financial institution depends on the type of loss you choose to
take on your return. See Loss on Deposits, earlier.

Disaster area losses. If you have a casualty loss in a federally declared
disaster area, you can choose to deduct the loss on your tax return for the
year immediately preceding the year in which the disaster occurred. This may
enable you to get an immediate refund of taxes you already paid. For more
information, get Publication 547.

Theft losses. You may generally deduct a theft loss only in the year you
discover your property is missing. You must be able to show there was a theft,
but you do not have to know when the theft took place. However, you should
show when you discovered that your property was missing.

Reimbursement Claims

If there is a reasonable prospect you will be reimbursed for part or all
of your loss, you must subtract the expected reimbursement when you figure
your loss. You must reduce your loss even if you do not receive payment
until a later tax year. You are believed to have a reasonable prospect of
reimbursement if you have filed suit for damages.

If you later receive less reimbursement than you expected, you include that
difference as a loss with your other losses (if any) on your return for the
year in which you can reasonably expect no more reimbursement.

Example. Your personal car had a FMV of $2,000 when it was destroyed in a
collision with another car in 1991. The accident was due to the negligence of
the other driver. At the end of the year, there was a reasonable prospect that
you would be fully reimbursed by the owner of the other car. Therefore, you do
not have a deductible loss in 1991.

In January 1992, the court awards you a judgment of $2,000, but in July, it
becomes apparent that you will be unable to collect any amount from the other
driver. Since this is your only casualty or theft loss, you can deduct the
loss in 1992 that is more than $100 and 10% of your 1992 adjusted gross
income.

If you later receive more reimbursement than you expected, you may have to
report the difference as income. If you have already taken a deduction for
a casualty or theft loss in one year, and then in a later year you receive
reimbursement, you must include it in your income for the later year to the
extent your deduction reduced your tax for the earlier year.

However, if any part of your original deduction for the loss did not actually
lower your tax, you do not include that part of the reimbursement in your
income. You do not refigure your tax for the year you claimed the deduction.
For more information, see Recoveries in Chapter 13.

Note. If the total of all the reimbursements you receive is more than your
adjusted basis in the destroyed or stolen property, you will have a gain
on the casualty or theft rather than a loss. Get Publication 547 for more
information on how to treat a gain from the reimbursement of a casualty or
theft.

Worksheet. Publication 525 has a worksheet for you to use when only part of
your original deduction reduced your tax in the earlier year.

If you receive exactly the reimbursement you expected to receive, you may not
have any amount to include in your income or any loss to deduct.

Example. In December 1991, you had a collision while driving your personal
car. Repairs to the car cost $950. You had $100 deductible collision insurance.
Your insurance company agreed to reimburse you for the rest of the damage. As
a result of your expected reimbursement from the insurance company, you do not
have a casualty loss deduction in 1991.

Due to the $100 rule, you cannot deduct the $100 you paid as the deductible.
When you receive the $850 from the insurance company in 1992, you do not have
to report it as income.

Recovered property is your property that was stolen and later returned to
you. If you recovered property after you have already taken a theft loss
deduction, you must refigure your loss as follows:

1)  Compare the property's adjusted basis (explained under Amount of Loss,
    earlier) to its decrease in value from the time it was stolen until the
    time it was recovered.

2)  From the smaller of these amounts, subtract any reimbursements (such as
    insurance) you received.

3)  Subtract $100 and 10% of your AGI of the loss year.

This is your refigured loss. If this amount is less than the amount you
deducted for the loss, you generally have to report the difference as income
in the recovery year. But report the difference only up to the amount that
reduced your tax.

How to Report a Loss

If you have a deductible casualty or theft loss from nonbusiness property,
you can claim this loss only on Schedule A (Form 1040).

Form 4684. Use Section A of Form 4684 to figure and report your gain or loss.
Be sure to attach Form 4684 to your return.

Section A - Personal Use Property. This section is for casualties and thefts of
property NOT used in a trade or business or for income producing purposes. You
must list each item or article for which you are reporting a casualty or theft
on Form 4684. If more than four items of property were stolen or damaged in
a single casualty or theft, attach additional Forms 4684 or sheets following
the format of lines 1 through 9 of Form 4684. If you have to figure your
loss on many different personal and household items, you may want to use the
worksheets in Publication 584. Copies of these worksheets can be used in place
of additional Forms 4684.

More than one casualty or theft. If you had more than one casualty or theft
during the year, you must complete lines 1 through 12 on separate Forms 4684
for each casualty or theft. Use only one Form 4684 for lines 13 through 18.

Losses. If you have only losses from nonbusiness property, transfer the amount
from line 18 of Section A, Form 4684, to line 17 of Schedule A (Form 1040).
Schedule A is used to itemize deductions. If you do not itemize deductions,
you cannot deduct your casualty or theft loss.

Gains. If you have only gains from nonbusiness property, this amount will
be shown on line 15 of Section A, Form 4684. You may also have to complete
Schedule D (Form 1040). For more information, get Publication 547.

Gains and losses. If you have both gains and losses due to casualties in a
single year, get Publication 547.

Adjustments to basis. If you have a casualty or theft loss deduction, you must
reduce your basis in the property by any deductible loss and any insurance
or other reimbursements. The result is your adjusted basis in the property.
Amounts you spend to restore your property after a casualty are added to your
adjusted basis. See Adjusted Basis in Publication 551 for more information.

Net operating loss. If your casualty or theft losses are more than your
income, you may have a net operating loss. A net operating loss can be used
to lower your taxes in an earlier year, allowing you to get a refund for taxes
that you have already paid. Or it can be used to lower your taxes in a later
year. You do not have to be in business to have a net operating loss from
a casualty or theft. For more information on net operating losses, get
Publication 536, Net Operating Losses.