54715090KCasualties,
Disasters,
and TheftsWhat's New1Reminder1Introduction1Casualty2Theft2Loss on Deposits3Proof of Loss3Figuring a Loss3Deduction Limits6Figuring a Gain9When To Report Gains and Losses11Disaster Area Losses11How To Report Gains and Losses13How To Get Tax Help14Index15What's NewDisaster mitigation.Disaster mitigation
Qualified disaster mitigation payments are now nontaxable. Also, if you have a gain on the sale or other transfer of property to the government
under a hazard mitigation program, you may not have to report the gain. For more information, see Qualified disaster mitigation payments
and Sale of property under hazard mitigation program later under Disaster Area Losses.
If you received a qualified disaster mitigation payment or had a gain on the sale or other transfer of property to the government under a hazard
mitigation program, previously included it in your income, and the time limit for amending your return for that year has not expired, you may be
entitled to a refund of taxes paid. To claim any refund, individuals must file Form 1040X, Amended U.S. Individual Income Tax Return. Form 1040X must
be filed within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later. A return
filed early is considered filed on the due date.
Katrina Emergency Tax Relief Act of 2005.
This Act provides tax relief for persons affected by Hurricane Katrina. Under the Act, you may be entitled to other tax benefits not covered in
this publication. For more details, see Publication 4492.
At the time this publication went to print, Congress was considering legislation that would provide additional tax relief for those affected by
Hurricanes Katrina, Rita, and Wilma. For more details, and to find out if this legislation was enacted, see Publication 4492.
Extended replacement period for property located in the Hurricane Katrina disaster area.Replacement period
The replacement period for property in the Hurricane Katrina disaster area that was damaged, destroyed, or stolen after August 24, 2005, has been
extended from 2 to 5 years. For more information, see Replacement Period later.
Limits on personal casualty or theft losses suspended.
If your loss arose in the Hurricane Katrina disaster area, the $100 rule and 10% rule do not apply. For more information, see Deduction
Limits later. Qualifying losses include losses from flooding or other casualty, and from theft, that arose in the Hurricane Katrina disaster
area and were caused by Hurricane Katrina. The Hurricane Katrina disaster area includes the states of Alabama, Florida, Louisiana, and
Mississippi.
ReminderPhotographs of missing children.Missing children, photographs of
The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children
selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
This publication explains the tax treatment of casualties, thefts, and losses on deposits. A casualty occurs when your property is damaged as a
result of a disaster such as a storm, fire, car accident, or similar event. A theft occurs when someone steals your property. A loss on deposits
occurs when your financial institution becomes insolvent or bankrupt.
This publication discusses the following topics.
Definitions of a casualty, theft, and loss on deposits.
How to figure the amount of your gain or loss.
How to treat insurance and other reimbursements you receive.
The deduction limits.
When and how to report a casualty or theft.
The special rules for disaster area losses.
Forms to file.
When you have a casualty or theft, you have to file Form 4684. You will also have to file one or more of the following forms.
Schedule A (Form 1040).
Schedule D (Form 1040).
Form 4797.
For details on which form to use, see How To Report Gains and Losses, later.
Condemnations.Condemnation
For information on condemnations of property, see Involuntary Conversions in chapter 1 of Publication 544.
Workbooks for casualties and thefts.Casualty losses:Workbooks for listing propertyTheft losses:Workbooks for listing propertyWorkbooks for property lost due to casualties and thefts
Publication 584 is available to help you make a list of your stolen or damaged personal-use property and figure your loss. It includes schedules to
help you figure the loss on your home and its contents, and your motor vehicles.
Publication 584-B is available to help you make a list of your stolen or damaged business or income-producing property and figure your loss.
Comments and suggestions.Comments on publicationSuggestions for publication
We welcome your comments about this publication and your suggestions for future editions.
You can write to us at the following address:
Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
1111 Constitution Ave. NW, IR-6406
Washington, DC 20224
We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in
your correspondence.
You can email us at
*taxforms@irs.gov. (The asterisk must be included in the
address.) Please put Publications Comment on the subject line. Although we cannot respond individually to each email, we do appreciate your
feedback and will consider your comments as we revise our tax products.
Tax questions.
If you have a tax question, visit
www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either
of the addresses listed above.
Ordering forms and publications.
Visit
www.irs.gov/formspubs
to download forms and publications, call 1-800-829-3676, or write to the National Distribution Center at the address shown under How To Get Tax
Help in the back of this publication.
Publication523Selling Your Home525Taxable and Nontaxable Income550Investment Income and Expenses551Basis of Assets584Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)584BBusiness Casualty, Disaster, and
Theft Loss WorkbookForm (and Instructions)Itemized DeductionsCapital Gains and LossesCasualties and TheftsSales of Business Property
See How To Get Tax Help near the end of this publication for information about getting publications and forms.
Casualty losses:DefinitionCasualty
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 loss is not deductible if the damage or destruction is caused by the following.
Accidentally breaking articles such as glassware or china under normal conditions.
A family pet.
A fire if you willfully set it, or pay someone else to set it.
A car accident if your willful negligence or willful act caused it. The same is true if the willful act or willful negligence of someone
acting for you caused the accident.
Loss of property due to progressive deterioration is not deductible as a casualty loss. This is because the damage results from a steadily
operating cause or a normal process, rather than from a sudden event. The following are examples of damage due to progressive deterioration.
The steady weakening of a building due to normal wind and weather conditions.
The deterioration and damage to a water heater that bursts. However, the rust and water damage to rugs and drapes caused by the bursting of
a water heater does qualify as a casualty.
Most losses of property caused by droughts. To be deductible, a drought-related loss generally must be incurred in a trade or business or in
a transaction entered into for profit.
Termite or moth damage.
The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. However, a sudden
destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss.
LossesTheftTheft lossesTheft lossesTheft
A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under
the law of the state where it occurred and it must have been done with criminal intent.
Theft includes the taking of money or property by the following means.
Blackmail.
Burglary.
Embezzlement.
Extortion.
Kidnapping for ransom.
Larceny.
Robbery.
The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.
Decline in market value of stock.
You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by
disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. However, you can
deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. You report a capital loss
on Schedule D (Form 1040). For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550.
Mislaid or lost property.Mislaid or lost propertyTheft losses:Mislaid or lost property
The simple disappearance of money or property is not a theft. However, an accidental loss or disappearance of property can qualify as a casualty
if it results from an identifiable event that is sudden, unexpected, or unusual. Sudden, unexpected, and unusual events were defined earlier.
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.
Deposit lossesLossesDepositsDeposit lossesLoss on Deposits
A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. If you incurred this type of
loss, you can choose one of the following ways to deduct the loss.
As a casualty loss.
As an ordinary loss.
As a nonbusiness bad debt.
Casualty loss or ordinary loss.Casualty losses:Deposits, loss on
You can choose to deduct a loss on deposits as a casualty loss or as 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 generally is made on the return you file for that year and
applies to all your losses on deposits for the year in that particular financial institution. If 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. However, you can take a nonbusiness bad
debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. Once you make the choice,
you cannot change it without permission from the Internal Revenue Service.
If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 22. The maximum amount you can claim
is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. Your loss is subject to the
2%-of-adjusted-gross-income limit. You cannot choose to claim an ordinary loss if any part of the deposit is federally insured.
Nonbusiness bad debt.Bad debtsNonbusiness bad debts
If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and
deduct the loss as a nonbusiness bad debt in that year.
How to report.Reporting gains and losses:Deposits
The kind of deduction you choose for your loss on deposits determines how you report your loss. See Table 1.
More information.
For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions
for Form 4684.
Deducted loss recovered.
If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of
recovery. 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, see Recoveries in Publication 525.
Losses:Proof ofProof of lossProof of Loss
To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. You also must be able to support the amount you
take as a deduction.
Casualty loss proof.Casualty losses:Proof of
For a casualty loss, you should be able to show all the following.
The type of casualty (car accident, fire, storm, etc.) and when it occurred.
That the loss was a direct result of the casualty.
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.
Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
Theft loss proof.Theft losses:Proof of
For a theft loss, you should be able to show all the following.
When you discovered that your property was missing.
That your property was stolen.
That you were the owner of the property.
Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
Losses:Records ofRecords of lossIt 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 to support it.
Figuring lossLossesFiguring amountFiguring lossFiguring a Loss
To determine your deduction for a casualty or theft loss, you must first figure your loss.
<ROM>Table 1.</ROM><BLD> Reporting Loss on Deposits</BLD>IF you choose to report the loss as a(n)...THEN report it on...casualty lossForm 4684 and Schedule A
(Form 1040).ordinary lossSchedule A (Form 1040).nonbusiness bad debtSchedule D (Form 1040).
Deposit losses:Reporting of (Table 1)Reporting gains and losses:Deposits:Table 1Tables and figures:Reporting loss on deposits (Table 1)
Amount of loss.
Figure the amount of your loss using the following steps.
Determine your adjusted basis in the property before the casualty or theft.
Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft.
From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to
receive.
For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine
the amount of your deductible loss.
Gain from reimbursement.Gains:Reimbursements
If your reimbursement is more than your adjusted basis in the property, you have a gain. This is true even if the decrease in the FMV of the
property is smaller than your adjusted 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 Figuring a Gain, later.
Business or income-producing property.Business or income-producing property
If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not
considered. Your loss is figured as follows:
Your adjusted basis in the propertyMINUSAny salvage valueMINUSAny insurance or other reimbursement you
receive or expect to receive
Loss of inventory.Inventory losses
There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers.
One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. Do not
claim this loss again as a casualty or theft loss. If you take the loss through the increase in the cost of goods sold, include any insurance or other
reimbursement you receive for the loss in gross income.
The other way is to deduct the loss separately. If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by
making a downward adjustment to opening inventory or purchases. Reduce the loss by the reimbursement you received. Do not include the reimbursement in
gross income. If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of
recovery.
Leased 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 minus any insurance or
other reimbursement you receive or expect to receive.
Separate computations.
Generally, if a single casualty or theft involves more than one item of property, 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 personal-use real property.Personal-use real property
In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs)
is treated as one item. Figure the loss using the smaller of the following.
The decrease in FMV of the entire property.
The adjusted basis of the entire property.
See Real property under Figuring the Deduction, later.
Decrease in
Fair Market ValueFair market value (FMV):Measuring decrease in
Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of
you know all the relevant facts.
The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately
before and immediately after the casualty or theft.
FMV of stolen property.Stolen propertyTheft lossesTheft losses:FMV of stolen property
The FMV of property immediately after a theft is considered to be zero since you no longer have the property.
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 just before they were stolen, and insurance did not cover them. Your theft loss is $150.
Recovered stolen property is your property that was stolen and later returned to you. If you recovered property after you had already taken a theft
loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time
just before it was stolen until the time it was recovered. Use this amount to refigure your total loss for the year in which the loss was deducted.
If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. But report
the difference only up to the amount of the loss that reduced your tax. For more information on the amount to report, see Recoveries in
Publication 525.
Figuring Decrease in FMV — Items To ConsiderFair market value (FMV):Measuring decrease in:Items to consider
To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. However, other measures also can be used to
establish certain decreases. See Appraisal and Cost of cleaning up or making repairs, next.
Appraisal.Appraisals
An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards should
be made by a competent appraiser. The appraiser must recognize the effects of any general market decline that may occur along with the casualty. This
information is needed to limit any deduction to the actual loss resulting from damage to the property.
Several factors are important in evaluating the accuracy of an appraisal, including the following.
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.
The appraiser's method of appraisal.
You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a Presidentially declared
disaster to establish the amount of your disaster loss. For more information on disasters, see Disaster Area Losses, later.
Cost of cleaning up or making repairs.Clean up costsCosts:Clean upCosts:RepairRepair costs
The cost of repairing damaged property is not part of a casualty loss. Neither is the cost of cleaning up after a casualty. But 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.
The repairs are actually made.
The repairs are necessary to bring the property back to its condition before the casualty.
The amount spent for repairs is not excessive.
The repairs take care of the damage only.
The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty.
Landscaping.Costs:LandscapingLandscaping
The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. You may be able to measure your loss
by what you spend on the following.
Removing destroyed or damaged trees and shrubs, minus any salvage you receive.
Pruning and other measures taken to preserve damaged trees and shrubs.
Replanting necessary to restore the property to its approximate value before the casualty.
Car value.Cars:Fair market value of
Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. You can use the books' retail
values and modify them by factors such as the mileage and 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, 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.
Figuring Decrease in FMV — Items Not To ConsiderFair market value (FMV):Measuring decrease in:Items not to consider
You generally should not consider the following items when attempting to establish the decrease in FMV of your property.
Cost of protection.Costs:ProtectionProtection costs
The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. The amount you spend on insurance or to
board up your house against a storm is not part of your loss. If the property is business property, these expenses are deductible as business
expenses.
If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in
the property. An example would be the cost of a dike to prevent flooding.
Related expenses.Costs:Incidental expensesIncidental expensesRelated expenses
The incidental expenses 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. However, they may be deductible as business expenses if the damaged or stolen property is business
property.
The cost of replacing stolen or destroyed property is not part of a casualty or theft loss.
Example.
You bought a new chair 4 years ago for $300. In April, a fire destroyed the chair. You estimate 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 cost.
Sentimental value.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 FMV.
Decline in market value of property in or near casualty area.Fair market value (FMV):Decline in value of property in or near casualty area
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
to be taken into consideration. You have a loss only for actual casualty damage to your property. However, if your home is in a federally declared
disaster area, see Disaster Area Losses, later.
Costs of photographs and appraisals.AppraisalsCosts:AppraisalsCosts:Photographs taken after lossPhotographs:Documentation of loss
Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. Photographs
showing the condition of the property after it was repaired, restored, or replaced may also be helpful.
Appraisals are used to figure the decrease in FMV because of a casualty or theft. See Appraisal, earlier, under Figuring Decrease
in FMV — Items To Consider, for information about appraisals.
The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of
the loss. They are expenses in determining your tax liability. You can claim these costs as a miscellaneous itemized deduction subject to the
2%-of-adjusted-gross-income limit on Schedule A (Form 1040).
The measure of your investment in the property you own is its basis. For property you buy, your basis is usually its cost to you. For property you
acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in
another way, as explained in Publication 551.
Adjustments to basis.
While you own the property, various events may take place that change your basis. Some events, such as additions or permanent improvements to the
property, increase basis. Others, such as earlier casualty losses and depreciation deductions, decrease basis. When you add the increases to the basis
and subtract the decreases from the basis, the result is your adjusted basis. See Publication 551 for more information on figuring the basis of your
property.
Insurance and
Other ReimbursementsFiguring loss:Insurance and other reimbursementsInsurance
If you receive an insurance or other 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 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. See Reimbursement Received After Deducting Loss, later.
Failure to file a claim for reimbursement.Reimbursements:Failure to file a claim
If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Otherwise, you cannot deduct this
loss as a casualty or theft.
The portion of the loss usually 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 your insurance did not cover the first $500 of an auto collision, 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, because your insurance
policy would never have reimbursed you for the deductible.
Types of ReimbursementsReimbursements:Types of
The most common type of reimbursement is an insurance payment for your stolen or damaged property. Other types of reimbursements are discussed
next. Also see the Instructions for Form 4684.
Employer's emergency disaster fund.Employer's emergency disaster fundReimbursements:Employer's emergency disaster fund
If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are
claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. Take into consideration only
the amount you used to replace your destroyed or damaged property.
Example.
Your home was extensively damaged by a tornado. Your loss after reimbursement from your insurance company was $10,000. Your employer set up a
disaster relief fund for its employees. Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed
property. You received $4,000 from the fund and spent the entire amount on repairs to your home. In figuring your casualty loss, you must reduce your
unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. Your casualty loss before applying the deduction limits (discussed
later) is $6,000.
Cash gifts.Cash giftsReimbursements:Cash gifts
If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty
loss by these excludable cash gifts. This applies even if you use the money to pay for repairs to property damaged in the disaster.
Example.
Your home was damaged by a hurricane. Relatives and neighbors made cash gifts to you that were excludable from your income. You used part of the
cash gifts to pay for repairs to your home. There were no limits or restrictions on how you could use the cash gifts. It was an excludable gift, so
the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home.
Insurance payments for living expenses.Insurance:Living expenses, payments forPayments for living expenses
You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations.
You lose the use of your main home because of a casualty.
Government authorities do not allow you access to your main home because of a casualty or threat of one.
Inclusion in income.
If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. Report this
amount on Form 1040, line 21. However, if the casualty occurs in a Presidentially declared disaster area, none of the insurance payments are taxable.
See Qualified disaster relief payments, later, under Disaster Area Losses.
A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period
you could not use your home and your normal living expenses for that period. Actual living expenses are the reasonable and necessary expenses incurred
because of the loss of your main home. Generally, these expenses include the amounts you pay for the following.
Renting suitable housing.
Transportation.
Food.
Utilities.
Miscellaneous services.
Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one.
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 for rent. None was charged for
the month the apartment was vacated. Your motel rent for this month was $1,200. You normally pay $200 a month for food. Your food expenses for the
month you lived in the motel were $400. You received $1,100 from your insurance company to cover your living expenses. You determine the payment you
must include in income as follows.
1)Insurance payment for living expenses$1,1002)Actual expenses during the month you are unable to use your home because of the fire $1,6003)Normal living expenses7254)Temporary increase in
living expenses: Subtract line 3
from line 28755)Amount of payment includible in income: Subtract line 4 from line 1$ 225
Tax year of inclusion.
You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you
receive the taxable part of the insurance payment.
Example.
Your main home was destroyed by a tornado in August 2003. You regained use of your home in November 2004. The insurance payments you received in
2003 and 2004 were $1,500 more than the temporary increase in your living expenses during those years. You include this amount in income on your 2004
Form 1040. If, in 2005, you receive further payments to cover the living expenses you had in 2003 and 2004, you must include those payments in income
on your 2005 Form 1040.
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.
Qualified disaster relief payments you receive for expenses you incurred as a result of a Presidentially declared disaster, are not taxable income
to you. For more information, see Qualified disaster relief payments under Disaster Area Losses, later.
Disaster unemployment assistance payments are unemployment benefits that are taxable.
Generally, disaster relief grants received under the Robert T. Stafford Disaster Relief and Emergency Assistance Act are not included in your
income. See Disaster relief grants, later, under Disaster Area Losses.
Reimbursement Received After Deducting LossReimbursements:Received after deducting loss
If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year
in which you get your actual reimbursement. This section explains the adjustment you may have to make.
Actual reimbursement less than expected.
If you later receive less reimbursement than you expected, 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 2004. The accident was due to the negligence of the
other driver. At the end of 2004, there was a reasonable prospect that the owner of the other car would reimburse you in full. You did not have a
deductible loss in 2004.
In January 2005, the court awards you a judgment of $2,000. However, 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 2005 that is figured by applying the deduction limits
(discussed later).
Actual reimbursement more than expected.
If you later receive more reimbursement than you expected, after you have claimed a deduction for the loss, you may have to include the extra
reimbursement in your income for the year you receive it. However, if any part of the original deduction did not reduce your tax for the earlier year,
do not include that part of the reimbursement in your income. You do not refigure your tax for the year you claimed the deduction. See Recoveries
in Publication 525 to find out how much extra reimbursement to include in income.
Example.
In 2004, a hurricane destroyed your motorboat. Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. You did not
itemize deductions on your 2004 return, so you could not deduct the loss. When the insurance company reimburses you for the loss, you do not report
any of the reimbursement as income. This is true even if it is for the full $3,000 because you did not deduct the loss on your 2004 return. The loss
did not reduce your tax.
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. If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the
gain in your income for the later year. Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier
year. You may be able to postpone reporting any remaining gain as explained under Postponement of Gain, later.
Actual reimbursement same as expected.
If you receive exactly the reimbursement you expected to receive, you do not have any amount to include in your income or any loss to deduct.
Example.
In December 2005, 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. Because you expected a reimbursement from the insurance company, you did
not have a casualty loss deduction in 2005.
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 2006, do not
report it as income.
Deduction limitsDeduction Limits
If your loss arose in the Hurricane Katrina disaster area after August 24, 2005, and was caused by Hurricane Kartrina, the $100 and 10% rules
(defined later) do not apply.
After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct.
The deduction for casualty and theft losses of employee property and personal-use property is limited. A loss on employee property is subject to
the 2% rule, discussed next. A loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. The 2%, $100, and
10% rules are also summarized in Table 2.
<ROM>Table 2. </ROM><BLD>Deduction Limit Rules for Personal-Use and Employee Property</BLD>$100 Rule* 10% Rule*2% RuleGeneral ApplicationYou must reduce each casualty or theft loss by $100 when figuring your deduction. Apply this rule to
personal-use property after you have figured the amount of your loss.You must reduce your total casualty or theft loss by 10% of your adjusted gross income. Apply this rule to
personal-use property after you reduce each loss by $100 (the $100 rule).You must reduce your total casualty or theft loss by 2% of your adjusted gross income. Apply this rule to property you used
in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous
itemized deductions.Single EventApply this rule only once, even if many pieces of property are affected.Apply this rule only once, even if many pieces of property are affected.Apply this rule only once, even if many pieces of property are affected.More Than One EventApply to the loss from each event.Apply to the total of all your losses from all events.Apply to the total of all your losses from all events.More Than One Person— With Loss From the
Same Event
(other than a married couple
filing jointly)Apply separately to each person.Apply separately to each person.Apply separately to each person.Married Couple— With Loss From the
Same EventFiling
Joint
ReturnApply as if you were one person.Apply as if you were one person.Apply as if you were one person.Filing
Separate
ReturnApply separately to each spouse.Apply separately to each spouse.Apply separately to each spouse.More Than One Owner (other than a married
couple filing jointly)Apply separately to each owner of jointly owned property.Apply separately to each owner of jointly owned property.Apply separately to each owner of jointly owned property.
*If your loss arose in the Hurricane Katrina disaster area after August 24, 2005, and was caused by Hurricane Katrina, the $100 and 10%
rules do not apply.
Deduction limits:Personal-use and employee property (Table 2)Employee property:Deduction limits (Table 2)Personal-use property:Deduction limits (Table 2)Tables and figures:Deduction limit rules for personal-use and employee property (Table 2)
Losses on business property (other than employee property) and income-producing property are not subject to these rules. However, if your casualty
or theft loss involved a home you used for business or rented out, your deductible loss may be limited. See the instructions for Form 4684, Section B.
If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions.
2% RuleDeduction limits: 2% rule
The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on
Schedule A (Form 1040), must be reduced by 2% of your adjusted gross income. Employee property is property used in performing services as an employee.
$100 RuleDeduction limits:$100 rule
If your loss arose in the Hurricane Katrina disaster area after August 24, 2005, and was caused by Hurricane Katrina, this rule does not apply.
After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. This
reduction applies to each total casualty or theft loss. It does not matter how many pieces of property are involved in an event. Only a single $100
reduction applies.
Example.
You have $250 deductible collision insurance on your car. The car is damaged in a collision. The insurance company pays you for the damage minus
the $250 deductible. The amount of the casualty loss is based solely on the deductible. The casualty loss is $150 ($250 − $100) because the
first $100 of a casualty loss on personal-use property is not deductible.
Single event.
Generally, events closely related in origin cause a single casualty. 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 pieces of property, such as a hailstorm
that damages both your home and your car parked in your driveway.
Example 1.
A thunderstorm destroyed your pleasure boat. You also lost some boating equipment in the storm. Your loss was $5,000 on the boat and $1,200 on the
equipment. Your insurance company reimbursed you $4,500 for the damage to your boat. You had no insurance coverage on the equipment. Your casualty
loss is from a single event and the $100 rule applies once. Figure your loss before applying the 10% rule (discussed later) as follows.
BoatEquipment1.Loss $5,000$1,2002.Subtract insurance4,500-0-3.Loss after reimbursement$ 500$1,2004.Total loss$1,7005.Subtract $1001006.Loss before 10% rule$1,600
Example 2.
Thieves broke into your home in January and stole a ring and a fur coat. You had a loss of $200 on the ring and $700 on the coat. This is a single
theft. The $100 rule applies to the total $900 loss.
Example 3.
In September, hurricane winds blew the roof off your home. Flood waters caused by the hurricane further damaged your home and destroyed your
furniture and personal car. This is considered a single casualty. The $100 rule is applied to your total loss from the flood waters and the wind.
More than one loss.
If you have more than one casualty or theft loss during your 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. Apply the $100 rule 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.
More than one person.
If two or more individuals (other than a husband and wife filing a joint return) have losses from the same casualty or theft, the $100 rule applies
separately to each individual.
Example.
A fire damaged your house and also damaged the personal property of your house guest. You must reduce your loss by $100. Your house guest must
reduce his or her loss by $100.
Married taxpayers.Married taxpayers:Deduction limits
If you and your spouse file a joint return, you are treated as one individual in applying the $100 rule. It does not matter whether you own the
property jointly or separately.
If you and your spouse have a casualty or theft loss and you file separate returns, each of you must reduce your loss by $100. This is true even if
you own the property jointly. If one spouse owns the property, only that spouse can figure a loss deduction on a separate return.
If the casualty or theft loss is on property you own as tenants by the entirety, each of you can figure your deduction on only one-half of the loss
on separate returns. Neither of you can figure your deduction on the entire loss on a separate return. Each of you must reduce the loss by $100.
More than one owner.
If two or more individuals (other than a husband and wife filing a joint return) have a loss on property jointly owned, the $100 rule applies
separately to each. For example, if two sisters live together in a home they own jointly and they have a casualty loss on the home, the $100 rule
applies separately to each sister.
10% RuleDeduction limits:10% rule
If your loss arose in the Hurricane Katrina disaster area after August 24, 2005, and was caused by Hurricane Katrina, this rule does not apply.
You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Apply this rule after
you reduce each loss by $100. If you have both gains and losses from casualties or thefts, see Gains and losses, later in this discussion.
Example.
In June, you discovered that your house had been burglarized. Your loss after insurance reimbursement was $2,000. Your adjusted gross income for
the year you discovered the theft is $29,500. Figure your theft loss as follows.
1.Loss after insurance$2,0002.Subtract $1001003.Loss after $100 rule$1,9004.Subtract 10% of $29,500 AGI$2,9505.Theft loss deduction$ -0-
You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950).
More than one loss.
If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. Then you must reduce the
total of all your losses by 10% of your adjusted gross income.
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, a fire 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 for the year
that the accident and fire occurred is $25,000. You figure your casualty loss deduction as follows.
CarBasement1.Loss$1,200$1,7002.Subtract $100 per incident1001003.Loss after $100 rule$1,100$1,6004.Total loss$2,7005.Subtract 10% of $25,000 AGI2,5006.Casualty loss deduction$ 200
Married taxpayers.Married taxpayers:Deduction limits
If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. It does not matter if you own the property
jointly or separately.
If you file separate returns, the 10% rule applies to each return on which a loss is claimed.
More than one owner.
If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies
separately to each.
Gains and losses.
If you have casualty or theft gains as well as losses to personal-use property, you must compare your total gains to your total losses. Do this
after you have reduced each loss by any reimbursements and by $100 but before you have reduced the losses by 10% of your adjusted gross income.
Casualty or theft gains do not include gains you choose to postpone. See Postponement of Gain, later.
Losses more than gains.
If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross
income. The rest, if any, is your deductible loss from personal-use property.
Example.
Your theft loss after reducing it by reimbursements and by $100 is $2,700. Your casualty gain is $700. Your loss is more than your gain, so you
must reduce your $2,000 net loss ($2,700 − $700) by 10% of your adjusted gross income.
Gains more than losses.
If your recognized gains are more than your losses, subtract your losses from your gains. The difference is treated as a capital gain and must be
reported on Schedule D (Form 1040). The 10% rule does not apply to your gains.
Example.
Your theft loss is $600 after reducing it by reimbursements and by $100. Your casualty gain is $1,600. Because your gain is more than your loss,
you must report the $1,000 net gain ($1,600 − $600) on Schedule D.
More information.
For information on how to figure recognized gains, see Figuring a Gain, later.
Figuring the DeductionFiguring loss
Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. However, a special rule applies to real property you
own for personal use.
Real property.
In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the
improvements) are considered together.
Example 1.
In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. (Your land was not
damaged.) This was your only casualty or theft loss for the year. The FMV of the property immediately before the fire was $180,000 ($145,000 for the
cottage and $35,000 for the land). The FMV immediately after the fire was $35,000 (value of the land). You collected $130,000 from the insurance
company. Your adjusted gross income for the year the fire occurred is $80,000. Your deduction for the casualty loss is $6,700, figured in the
following manner.
1.Adjusted basis of the entire property (cost in this example)$144,8002.FMV of entire property
before fire$180,0003.FMV of entire property after fire35,0004.Decrease in FMV of entire property (line 2 − line 3)$145,0005.Loss (smaller of line 1 or line 4)$144,8006.Subtract insurance130,0007.Loss after reimbursement$14,8008.Subtract $1001009.Loss after $100 rule$14,70010.Subtract 10% of $80,000 AGI8,00011.Casualty loss deduction$ 6,700
Example 2.
You bought your home a few years ago. You paid $150,000 ($10,000 for the land and $140,000 for the house). You also spent an additional $2,000 for
landscaping. This year a fire destroyed your home. 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 $175,000 before the fire, but only $50,000 after the fire. Shortly after
the fire, the insurance company paid you $95,000 for the loss. Your adjusted gross income for this year is $70,000. You figure your casualty loss
deduction as follows.
1.Adjusted basis of the entire property (cost of land, building, and landscaping)$152,0002.FMV of entire property
before fire$175,0003.FMV of entire property after fire50,0004.Decrease in FMV of entire property (line 2 − line 3)$125,0005.Loss (smaller of line 1 or line 4)$125,0006.Subtract insurance95,0007.Loss after reimbursement$30,0008.Subtract $1001009.Loss after $100 rule$29,90010.Subtract 10% of $70,000 AGI7,00011.Casualty loss deduction$ 22,900
Personal property.Personal property:Loss deduction, figuring of
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. Then combine these separate losses to figure the total loss. Reduce the
total loss by $100 and 10% of your adjusted gross income to figure the loss deduction.
Example 1.
In August, a storm destroyed your pleasure boat, which cost $18,500. This was your only casualty or theft loss for the year. Its FMV immediately
before the storm was $17,000. You had no insurance, but were able to salvage the motor of the boat and sell it for $200. Your adjusted gross income
for the year the casualty occurred is $70,000.
Although the motor was sold separately, it is part of the boat and not a separate item of property. You figure your casualty loss deduction as
follows.
1.Adjusted basis (cost in this example)$18,5002.FMV before storm$17,0003.FMV after storm2004.Decrease in FMV
(line 2 − line 3)$16,8005.Loss (smaller of line 1 or line 4)$16,8006.Subtract insurance-0-7.Loss after reimbursement$16,8008.Subtract $1001009.Loss after $100 rule$16,70010.Subtract 10% of $70,000 AGI7,00011.Casualty loss deduction$ 9,700
Example 2.
In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. You had bought the car for
$30,000. The FMV of the car just before the accident was $17,500. Its FMV just after the accident was $180 (scrap value). Your insurance company
reimbursed you $16,000.
Your watch was not insured. You had purchased it for $250. Its FMV just before the accident was $500. Your adjusted gross income for the year the
accident occurred is $97,000. Your casualty loss deduction is zero, figured as follows.
CarWatch1.Adjusted basis (cost)$30,000$2502.FMV before accident$17,500$5003.FMV after accident180-0-4.Decrease in FMV (line 2 − line 3)$17,320$5005.Loss (smaller of line 1 or line 4)$17,320$2506.Subtract insurance16,000-0-7.Loss after reimbursement$1,320$2508.Total loss$1,5709.Subtract $10010010.Loss after $100 rule$1,47011.Subtract 10% of $97,000 AGI9,70012.Casualty loss deduction$ -0-
Both real and personal properties.
When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. However, you apply a
single $100 reduction to the total loss. Then, you apply the 10% rule to figure the casualty loss deduction.
Example.
In July, a hurricane damaged your home, which cost you $164,000 including land. The FMV of the property (both building and land) immediately before
the storm was $170,000 and its FMV immediately after the storm was $100,000. Your household furnishings were also damaged. You separately figured the
loss on each damaged household item and arrived at a total loss of $600.
You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. Your adjusted gross
income for the year the hurricane occurred is $65,000. You figure your casualty loss deduction from the hurricane in the following manner.
1.Adjusted basis of real property (cost in this example)$164,0002.FMV of real property before
hurricane$170,0003.FMV of real property after hurricane100,0004.Decrease in FMV of real property (line 2 − line 3)$70,0005.Loss on real property (smaller of line 1 or line 4)$70,0006.Subtract insurance50,0007.Loss on real property after reimbursement$20,0008.Loss on furnishings$6009.Subtract insurance-0-10.Loss on furnishings after reimbursement$60011.Total loss (line 7 plus line 10)$20,60012.Subtract $10010013.Loss after $100 rule $20,50014.Subtract 10% of $65,000 AGI6,50015.Casualty loss deduction$ 14,000
Property used partly for business and partly for personal purposes.Business purposes, property used partly for
When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must
be figured separately for the personal-use portion and for the business or income-producing portion. You must figure each loss separately because the
losses attributed to these two uses are figured in two different ways. When figuring each loss, allocate the total cost or basis, the FMV before and
after the casualty or theft loss, and the insurance or other reimbursement between the business and personal use of the property. The $100 rule and
the 10% rule apply only to the casualty or theft loss on the personal-use portion of the property.
Example.
You own a building that you constructed on leased land. You use half of the building for your business and you live in the other half. The cost of
the building was $400,000. You made no further improvements or additions to it.
A flood in March damaged the entire building. The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. Your
insurance company reimbursed you $40,000 for the flood damage. Depreciation on the business part of the building before the flood totaled $24,000.
Your adjusted gross income for the year the flood occurred is $125,000.
You have a deductible business casualty loss of $10,000. You do not have a deductible personal casualty loss because of the 10% rule. You figure
your loss as follows.
Business Personal PartPart 1.Cost (total $400,000)$200,000$200,000 2.Subtract depreciation24,000-0- 3.Adjusted basis$176,000$200,000 4.FMV before flood (total $380,000)$190,000$190,000 5.FMV after flood (total $320,000)160,000160,000 6.Decrease in FMV
(line 4 − line 5)$30,000$30,000 7.Loss (smaller of line 3 or line 6)$30,000$30,000 8.Subtract insurance20,00020,000 9.Loss after reimbursement$10,000$10,00010.Subtract $100 on personal-use property-0-10011.Loss after $100 rule$10,000$9,90012.Subtract 10% of $125,000 AGI on personal-use property -0-12,50013.Deductible business loss$10,00014.Deductible personal loss$ -0-
Figuring gainGains:FiguringFiguring a Gain
If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you
have a gain from the casualty or theft. Your gain is figured as follows.
The amount you receive (discussed next), minus
Your adjusted basis in the property at the time of the casualty or theft. See Adjusted Basis, earlier, for information on
adjusted basis.
Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain.
Amount you receive.
The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. It
also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property.
Example.
A hurricane destroyed your personal residence and the insurance company awarded you $145,000. You received $140,000 in cash. The remaining $5,000
was paid directly to the holder of a mortgage on the property. The amount you received includes the $5,000 reimbursement paid on the mortgage.
Main home destroyed.
If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your
home. You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). For information on this exclusion, see
Publication 523. If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the
excess gain. See Postponement of Gain, later.
Reporting a gain.Reporting gains and losses
You generally must report your gain as income in the year you receive the reimbursement. However, you do not have to report your gain if you meet
certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next.
For information on how to report a gain, see How To Report Gains and Losses, later.
If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another
casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. See
10% Rule under Deduction Limits, earlier.
Postponement of GainGains:Postponement ofPostponement of gain
Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property.
Your basis in the new property is generally the same as your adjusted basis in the property it replaces.
You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. However, you can
choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within
a specified replacement period, discussed later. You also can choose to postpone reporting the gain if you purchase a controlling interest (at least
80%) in a corporation owning property that is similar or related in service or use to the property. See Controlling interest in a corporation,
later.
If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property.
To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. If the cost of
the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement.
Example.
In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. You made no further improvements or additions to it. When a
storm destroyed the cottage this January, the cottage was worth $250,000. You received $146,000 from the insurance company in March. You had a gain of
$128,000 ($146,000 − $18,000).
You spent $144,000 to rebuild the cottage. Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 −
$144,000) in your income.
Buying replacement property from a related person.Related person, replacement property bought from
You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). This
rule applies to the following taxpayers.
C corporations.
Partnerships in which more than 50% of the capital or profits interest is owned by C corporations.
All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for
the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000.
For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than
$100,000. If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. If the property is owned by an S
corporation, the $100,000 limit applies to the S corporation and each shareholder.
Exception.
This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the
destroyed or stolen property.
Related persons.
Under this rule, related persons include, for example, a corporation and an individual who owns more than 50% of its outstanding stock and two
partnerships in which the same C corporations own more than 50% of the capital or profits interests. For more information on related persons, see
Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544.
Death of a taxpayer.Death of taxpayer:Postponement of gain
If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent
realized the gain. The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by
buying replacement property.
Replacement PropertyReplacement property
You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. Property you acquire as a gift or
inheritance does not qualify.
You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. If you spend the
money you receive from the insurance company for other purposes, and borrow money to buy replacement property, you can still postpone reporting the
gain if you meet the other requirements.
If you pay a contractor in advance to replace your destroyed or stolen property, you are not considered to have bought replacement property unless
it is finished before the end of the replacement period. See Replacement Period, later.
Similar or related in service or use.
Replacement property must be similar or related in service or use to the property it replaces.
Timber loss.Timber loss
Standing timber you bought with the proceeds from the sale of timber downed by a casualty (such as high winds, earthquakes, or volcanic eruptions)
qualifies as replacement property. If you bought the standing timber within the specified replacement period, you can postpone reporting the gain.
Owner-user.
If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it
replaces.
Example.
Your home was destroyed by fire and you invested the insurance proceeds in a grocery store. Your replacement property is not similar or related in
service or use to the destroyed property. To be similar or related in service or use, your replacement property must also be used by you as your home.
Main home in disaster area.Replacement property:Main home:In disaster area
Special rules apply to replacement property related to the damage or destruction of your main home (or its contents) if located in a federally
declared disaster area. For more information, see Gains Realized on Homes in Disaster Areas in the Instructions for Form 4684.
Owner-investor.
If you are an owner-investor, similar or related in service or use means that any replacement property must have a similar relationship of services
or uses to you as the property it replaces. You decide this by determining all the following.
Whether the properties are of similar service to you.
The nature of the business risks connected with the properties.
What the properties demand of you in the way of management, service, and relations to your tenants.
Example.
You owned land and a building you rented to a manufacturing company. The building was destroyed by fire. During the replacement period, you had a
new building constructed. You rented out the new building for use as a wholesale grocery warehouse. Because the replacement property is also rental
property, the two properties are considered similar or related in service or use if there is a similarity in all the following areas.
Your management activities.
The amount and kind of services you provide to your tenants.
The nature of your business risks connected with the properties.
Business or income-producing property located in a Presidentially declared disaster area.Disaster area losses:Presidentially declared disasterPresidentially declared disasters
If your destroyed business or income-producing property was located in a Presidentially declared disaster area, any tangible replacement property
you acquire for use in any business is treated as similar or related in service or use to the destroyed property. For more information, see
Disaster Area Losses, later.
Controlling interest in a corporation.
You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your
damaged, destroyed, or stolen property. You can postpone reporting your entire gain if the cost of the stock that gives you a controlling interest is
at least as much as the amount received (reimbursement) for your property. You have a controlling interest if you own stock having at least 80% of the
combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock.
Basis adjustment to corporation's property.Adjustments to basisBasis:Adjustments toReplacement property:Basis adjustment to corporation's property
The basis of property held by the corporation at the time you acquired control must be reduced by the amount of your postponed gain, if any. You
are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after
reduction by the amount of your postponed gain).
Allocate this reduction to the following classes of property in the order shown below.
Property that is similar or related in service or use to the destroyed or stolen property.
Depreciable property not reduced in (1).
All other property.
If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted bases of all the
properties in that class. The reduced basis of any single property cannot be less than zero.
Main home replaced.Replacement property:Main home
If your gain from the reimbursement you receive because of the destruction of your main home is more than the amount you can exclude from your
income (see Main home destroyed under Figuring a Gain, earlier), you can postpone reporting the excess gain by buying
replacement property that is similar or related in service or use. To postpone reporting all the excess gain, the replacement property must cost at
least as much as the amount you received because of the destruction minus the excluded gain.
Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your
main home for the period you owned and used the destroyed property as your main home.
Basis of replacement property.Basis:Replacement propertyReplacement property:Basis of
You must reduce the basis of your replacement property (its cost) by the amount of postponed gain. In this way, tax on the gain is postponed until
you dispose of the replacement property.
Example.
A fire destroyed your rental home that you never lived in. The insurance company reimbursed you $67,000 for the property, which had an adjusted
basis of $62,000. You had a gain of $5,000 from the casualty. If you have another rental home constructed for $110,000 within the replacement period,
you can postpone reporting the gain. You will have reinvested all the reimbursement (including your entire gain) in the new rental home. Your basis
for the new rental home will be $105,000 ($110,000 cost − $5,000 postponed gain).
Replacement PeriodReplacement period
To postpone reporting your gain, you must buy replacement property within a specified period of time. This is the replacement period.
The replacement period begins on the date your property was damaged, destroyed, or stolen.
The replacement period ends 2 years after the close of the first tax year in which any part of your gain is realized.
Example.
You are a calendar year taxpayer. While you were on vacation, a valuable piece of antique furniture that cost $2,200 was stolen from your home. You
discovered the theft when you return home on August 10, 2005. Your insurance company investigated the theft and did not settle your claim until
January 2, 2006, when they paid you $3,000. You first realized a gain from the reimbursement for the theft during 2006, so you have until December 31,
2008, to replace the property.
Main home in disaster area.Disaster area losses:Main home rules
For your main home (or its contents) located in a Presidentially declared disaster area, the replacement period ends 4 years after the close of the
first tax year in which any part of your gain is realized. See Disaster Area Losses, later.
Example.
You are a calendar year taxpayer. A hurricane destroyed your home in September 2005. In December 2005, the insurance company paid you $3,000 more
than the adjusted basis of your home. The area in which your home is located is not a Presidentially declared disaster area. You first realized a gain
from the reimbursement for the casualty in 2005, so you have until December 31, 2007, to replace the property. If your home had been in a
Presidentially declared disaster area, you would have until December 31, 2009, to replace the property.
Property in the Hurricane Katrina disaster area.
For property located in the Hurricane Katrina disaster area that was destroyed, damaged, or stolen after August 24, 2005, as a result of Hurricane
Katrina, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. This 5-year replacement
period applies only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area.
Property in the New York Liberty Zone.Disaster area losses:New York Liberty Zone propertyNew York Liberty Zone:Replacement period
For property located in the New York Liberty Zone that was damaged or destroyed as a result of the September 11, 2001, terrorist attacks, the
replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. This 5-year replacement period
applies only if substantially all of the use of the replacement property is in the City of New York, New York.
Area defined.
The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand
Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York.
Extension.Replacement period:Extension of
You may get an extension of the replacement period if you apply to the director of the Internal Revenue Service for your area. Your application
must contain all the details about the need for the extension. You should make the application before the end of the replacement period.
However, you can file an application within a reasonable time after the replacement period ends if you have a good reason for the delay. An
extension may be granted if you can show that there is reasonable cause for not making the replacement within the regular period.
Ordinarily, requests for extensions are not made or granted until near the end of the replacement period or the extended replacement period.
Extensions are usually limited to a period of not more than 1 year. The high market value or scarcity of replacement property is not sufficient
grounds for granting an extension. If your replacement property is being constructed and you clearly show that the construction cannot be completed
within the replacement period, you may be granted an extension of the period.
<ROM>Table 3.</ROM><BLD> When To Deduct a Casualty or Theft Loss</BLD>IF you have a loss...THEN deduct it in the year...from a casualtythe loss occurred.in a Presidentially declared disaster areathe disaster occurred or the year immediately
before the disaster.from a theftthe theft was discovered.on a deposit treated as a casualty a reasonable estimate can be made.
Casualty losses:When to deduct (Table 3)Deposit losses:When to deduct (Table 3)Disaster area losses:When to deduct:Table 3Losses:When to report:(Table 3)Tables and figures:When to deduct losses (Table 3)Theft losses:When to deduct (Table 3)
How To Postpone a GainGains:Postponement ofPostponement of gain
You postpone reporting your gain from a casualty or theft by reporting your choice on your tax return for the year you have the gain. You have the
gain in the year you receive insurance proceeds or other reimbursements that result in a gain.
If a partnership or a corporation owns the stolen or destroyed property, only the partnership or corporation can choose to postpone reporting the
gain.
Required statement.Postponement of gain:Required statement
You should attach a statement to your return for the year you have the gain. This statement should include the following.
The date and details of the casualty or theft.
The insurance or other reimbursement you received from the casualty or theft.
How you figured the gain.
Replacement property acquired before return filed.Postponement of gain:Replacement property acquired before return filedReplacement property:Postponement of gain
If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed
information about all of the following.
The replacement property.
The postponed gain.
The basis adjustment that reflects the postponed gain.
