Casualties and Thefts If your property is destroyed, damaged, or stolen, you may have adeductible loss. If the insurance or other reimbursement is more thanthe adjusted basis of the destroyed, damaged, or stolen property, youmay have a taxable gain. Casualty.A casualty is the damage, destruction, or loss of propertyresulting from an identifiable event that is sudden, unexpected, orunusual. Deductible losses.Deductible casualty losses can result from a number of differentcauses, including the following. Airplane crashes. Car or truck accidents not resulting from your willful actor willful negligence. Earthquakes. Fires. Floods. Freezing. Hurricanes. Lightning. Shipwrecks. Storms. Nondeductible losses.A casualty loss is not deductible if the damage or destruction iscaused by the following. Accidentally breaking articles such as glassware or chinaunder normal conditions. A family pet. A fire if you willfully set it, or pay someone else to setit. A car or truck accident if your willful negligence orwillful act caused it. The same is true if the willful act or willfulnegligence of someone acting for you caused the accident. Progressive deterioration (explained next). Progressive deterioration.Loss of property due to progressive deterioration is not deductibleas a casualty loss. This is because the damage results from a steadilyoperating cause or a normal process, rather than from a sudden event.Examples of damage due to progressive deterioration include damagefrom rust, corrosion, or termites. However, weather-related conditionsor disease may cause another type of involuntary conversion. SeeOther Involuntary Conversions, later. Theft.A theft is the taking and removing of money or property with theintent to deprive the owner of it. The taking of your property must beillegal under the law of the state where it occurred and it must havebeen done with criminal intent. Theft includes the taking of money or property by the followingmeans. Blackmail. Burglary. Embezzlement. Extortion. Kidnapping for ransom. Larceny. Robbery. Threats. The taking of money or property through fraud or misrepresentationis theft if is illegal under state or local law. Mislaid or lost property.The simple disappearance of money or property is not a theft.However, an accidental loss or disappearance of property can qualifyas a casualty if it results from an identifiable event that is sudden,unexpected, or unusual. Example.A car door is accidentally slammed on your hand, breaking thesetting of your diamond ring. The diamond falls from the ring and isnever found. The loss of the diamond is a casualty. Farming Losses Certain casualty or theft losses that occur in the business offarming are deductible losses. The following is a discussion of somelosses you can deduct and some you cannot deduct. Livestock or produce purchased for sale.Casualty or theft losses of livestock or produce bought for saleare deductible if you report your income on the cash method. If youreport your income on an accrual method, take casualty and theftlosses on property bought for sale by omitting the item from theclosing inventory for the year of the loss. You cannot take a separatededuction. Livestock, plants, produce, and crops raised for sale.Losses of livestock, plants, produce, and crops raised for sale aregenerally not deductible if you report your income on the cash method.You have already deducted the cost of raising these items as farmexpenses. For plants with a preproductive period of more than 2 years, youmay have a deductible loss if you have a tax basis in the plants. Youusually have a tax basis if you capitalized the expenses associatedwith these plants under the uniform capitalization rules. The uniformcapitalization rules are discussed in chapter 7. If you report your income on an accrual method, casualty or theftlosses are deductible only if you included the items inyour inventory at the beginning of your tax year. You get thededuction by omitting the item from your inventory at the close ofyour tax year. You cannot take a separate casualty or theft deduction. Income loss.A loss of future income is not deductible. Example.An ice storm damaged your standing timber by reducing its rate ofgrowth and its quality. The storm did not cause any physical damage,but you determined that the timber will sell for less than youanticipated because of the reduced growth rate and quality. The lossof future income is not deductible. Loss of timber.If you sell timber downed by a casualty, treat the proceeds fromthe sale as a reimbursement. If you use the proceeds to buy qualifiedreplacement property, you can postpone reporting the gain. SeePostponing Gain, later. Property used in farming.Casualty and theft losses of property used in the farm businessusually result in deductible losses. If a fire or storm destroyed yourbarn, or you lose by casualty or theft an animal you bought for draft,breeding, diary, or sport, you may have a deductible loss. SeeHow To Figure a Loss, discussed later. Raised draft, breeding, dairy, or sporting animals.Generally, losses of raised, draft, breeding, dairy, or sportinganimals do not result in deductible casualty or theft losses becauseyou have no basis in the animals. However, you may be able to claim adeduction if either of the following situations applies to you. You use inventories to determine your income and youincluded the animals in your inventory. You capitalized the expenses associated with the animalsunder the uniform capitalization rules and therefore have a tax basisin the animals that were subject to a casualty or theft. When you include livestock in inventory, its last inventory valueis its basis. When an inventoried animal held for draft, breeding,dairy, or sport is lost by casualty or theft during the year, decreaseending inventory by the value at which you included the animal ininventory. You cannot take a separate deduction. How To Figure a Loss How you figure a deductible casualty or theft loss depends onwhether the loss was to farm or personal-use property and whether theproperty was stolen or partly or completely destroyed. Farm property.Farm property is the property you use in your farming business. Ifyour farm property was completely destroyed or stolen, yourloss is figured as follows: Formula If your farm property was partially damaged, use thesteps shown under Personal-use property, next, to figureyour casualty loss. But do not apply the deduction limits. Personal-use property.Personal-use property is property used by you or your familymembers for personal use. You figure the amount of your casualty ortheft loss on this property by using the following steps. Determine your adjusted basis in the propertybefore the casualty or theft. Determine the decrease in fair market value ofthe 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 luxury hotels in Thirayoureceive or expect to receive. You must apply the deduction limits, discussed later, todetermine your deductible loss. TaxTip: Publication 584 is available to help you make a list of your stolenor damaged property and figure your loss. It includes schedules tohelp you figure the loss on your home and its contents, and on yourmotor vehicles. Adjusted basis.Adjusted basis is your basis (usually cost) increased or decreasedby various events, such as improvements and casualty losses. For moreinformation about adjusted basis, see chapter 7. Decrease in fair market value (FMV).The decrease in FMV is the difference between the property's valueimmediately before the casualty or theft and its value immediatelyafterwards. FMV is defined in chapter 12. Cost of cleaning up or making repairs.The cost of repairing damaged property is not part of a casualtyloss. Neither is the cost of cleaning up after a casualty. But you canuse the cost of cleaning up or of making repairs after a casualty as ameasure of the decrease in FMV if you meet all the followingconditions. The repairs are necessary to bring the property back to itscondition before the casualty. The amount spent for repairs is not excessive. The repairs fix only the damage. The value of the property after the repairs is not, due tothe repairs, more than the value of the property before thecasualty. Related expenses.The incidental expenses due to a casualty or theft, such asexpenses for the treatment of personal injuries, for temporaryhousing, or for a rental car, are not part of your casualty or theftloss. However, they may be deductible as farm business expenses if thedamaged or stolen property is farm property. Separate computations for more than one item of property.Generally, if a single casualty or theft involves more than oneitem of property, you must figure your loss separately for each itemof property. Then combine the losses to determine your total loss. Caution: There is an exception for personal-use real property. SeeException for personal-use real property, later. Example.A fire on your farm damaged a tractor and the barn in which it wasstored. The tractor had an adjusted basis of $3,300. Its FMV was$2,800 just before the fire and $1,000 immediately afterward. The barnhad an adjusted basis of $8,000. Its FMV was $25,000 just before thefire and $15,000 immediately afterward. You received insurancereimbursements of $600 on the tractor and $6,000 on the barn. Figureyour deductible casualty loss separately for the two items ofproperty. Tractor Barn 1) Adjusted basis    $3,300    $8,000 2) FMV before fire $2,800 $25,000 3) FMV after fire     1,000    15,000 4) Decrease in FMV (2 minus 3)    $1,800   $10,000 5) Loss (lesser of 1 or 4) $1,800 $8,000 6) Minus: Insurance       600     6,000 7) Deductible casualty loss $1,200 $2,000 8) Total loss $3,200 Exception for personal-use real property.In figuring a casualty loss on personal-use real property, theentire property (including any improvements, such as buildings, trees,and shrubs) is treated as one item. Figure the loss using the smallerof the following. The decrease in FMV of the entire property. The adjusted basis of the entire property. Example.You bought a farm in 1960 for $20,000. The adjusted basis of theresidential part is $6,000. In 1999, a windstorm blew down shade treesand three ornamental trees planted at a cost of $600 on theresidential part. The adjusted basis of the residential part includesthe $600. The fair market value (FMV) of the residential partimmediately before the storm was $30,000, and $26,000 immediatelyafter the storm. The trees were not covered by insurance. 1) Adjusted basis    $6,000 2) FMV before the storm $30,000 3) FMV after the storm    26,000 4) Decrease in FMV (line 2 minus line 3)    $4,000 5) Loss before insurance(lesser of line 1 or line 4) $4,000 6) Minus: Insurance       -0- 7) Amount of loss $4,000 Insurance and other reimbursements.If you receive an insurance or other type of reimbursement, youmust subtract the reimbursement when you figure your loss. You do nothave a casualty or theft loss to the extent you are reimbursed. Caution: Do not subtract insurance payments for living expenses from yourloss. You may have to include these payments in your income. SeePublication 547for details. If you expect to be reimbursed for part or all of your loss, youmust subtract the expected reimbursement when you figure your loss.You must reduce your loss even if you do not receive payment until alater tax year. Reimbursement in a later year.If you figured your casualty or theft loss using your expectedreimbursement, you may have to adjust the tax return for the tax yearin which you get your actual reimbursement. Actual reimbursement less than expected.If you later receive less reimbursement than you expected, includethat difference as a loss with your other losses (if any) on yourreturn for the year in which you can reasonably expect no morereimbursement. Actual reimbursement more than expected.If you later receive more reimbursement than you expected after youhave claimed a deduction for the loss, you may have to include theextra reimbursement in your income for the year you receive it.However, if any part of your original deduction did not reduce yourtax for the earlier year, do not include that part of thereimbursement in your income. You do not refigure your tax for theyear you claimed the deduction. See Recoveries inPublication 525 to find out how much extra reimbursement to include inincome. Caution: If the total of all the reimbursements you receive is more thanyour adjusted basis in the destroyed or stolen property, you will havea gain on the casualty or theft. If you have already takena deduction for a loss and you receive the reimbursement in a lateryear, you may have to include the gain in your income for the lateryear. Include the gain as ordinary income up to the amount of yourdeduction that reduced your tax for the earlier year. See Publication 547for more information on how to treat a gain from the reimbursementof a casualty or theft. 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 todeduct. Lump-sum reimbursement.If you have a casualty or theft loss of several assets at the sametime without an allocation of reimbursement to specific assets, dividethe lump-sum reimbursement among the assets according to the fairmarket value of each asset at the time of the loss. Figure the gain orloss separately for each asset that has a separate basis. Adjustments to basis.If you have a casualty or theft loss, you must decrease your basisin the property by any insurance or other reimbursement you receiveand by any deductible loss. The result is your adjusted basis in theproperty. Amounts you spend to restore your property after a casualtyincrease your adjusted basis. See Adjusted Basis in chapter 7for more information. Deduction Limits on Losses of Personal-Use Property Casualty and theft losses of property held for personal use may bedeductible if you itemize deductions on Schedule A (Form 1040). There are two limits on the amount you can deduct for your casualtyor theft loss of personal-use property. You figure these limits onForm 4684. $100 rule.You must reduce each casualty or theft loss on personal-useproperty by $100. This $100 rule applies after you have subtracted anyreimbursement. 10% rule.You must further reduce the total of all your casualty of theftlosses on personal-use property by 10% of your adjusted gross income.Apply this rule after you reduce each loss by $100. Adjusted grossincome is on line 33 of Form 1040. Example.In June, you discovered that your house had been burglarized. Yourloss after insurance reimbursement was $2,000. Your adjusted grossincome is $29,500. Figure your theft loss 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- You do not have a theft loss deduction because your loss ($1,900)is less than 10% of your adjusted gross income ($2,950). Caution: If you have a casualty or theft gain in addition to a loss, youwill have to make a special computation to figure your 10% limit. See10% Rule in Publication 547. When Loss Is Deductible Casualty losses are generally deductible only in the year in whichthey occur. Theft losses are generally deductible only in the yearthey are discovered. However, see Disaster Area Losses,later. Leased property.If you lease property from someone else, you can deduct a loss onthe property in the year your liability for the loss is fixed. This istrue even if the loss occurred or the liability was paid in adifferent year. You are not entitled to a deduction until yourliability under the lease can be determined with reasonable accuracy.Your liability can be ascertained with reasonable accuracy when aclaim for recovery is settled, adjudicated, or abandoned. Example.Robert leased a tractor from First Implement, Inc. for use in hisfarm business. The tractor was destroyed by a tornado in June 1999.The loss was not insured. First Implement billed Robert for the fairmarket value of the tractor on the date of the loss. Robert disagreedwith the amount of the liability. First Implement later filed a suitin court against Robert. In 2000, Robert and First Implement agreed tosettle the suit for $20,000, and the court entered a judgement infavor of First Implement. Robert paid $20,000 in June 2000. He canclaim the $20,000 as a loss on his 2000 tax return. Net operating loss (NOL).If your deductions, including casualty or theft loss deductions,are more than your income for the year, you may have an NOL. An NOLcan be carried back or carried forward and deducted from income inother years. See chapter 5for more information on NOLs. Proof of Loss To deduct a casualty or theft loss, you must be able to prove thatthere was a casualty or theft. You must be able to support the amountyou claim for the loss. Casualty.For a casualty loss, your records should show all of the following. The type of casualty (car accident, fire, storm, etc.) andwhen it occurred. That the loss was a direct result of the casualty. That you were the owner of the property or, if you leasedthe property from someone else, that you were contractually liable tothe owner for the damage. Theft.For a theft, your records should show all of the following. When you discovered that your property was missing. That your property was stolen. That you were the owner of the property. Figuring a Gain If you receive insurance or other reimbursement that is more thanyour adjusted basis in the destroyed, damaged, or stolen property, youhave a gain from the casualty or theft. You generally report your gainas income in the year you receive the reimbursement. However,depending on the type of property you receive, you may not have toreport your gain. See Postponing Gain, later. Your gain is figured as follows: The amount you receive, minus Your adjusted basis in the property at the time of thecasualty or theft. Even if the decrease in FMV of your property is smaller than theadjusted basis of your property, use your adjusted basis to figure thegain. Amount you receive.The amount you receive includes any money plus the value of anyproperty you receive, minus any expenses you have in obtainingreimbursement. It also includes any reimbursement used to pay off amortgage or other lien on the damaged, destroyed, or stolen property. Example.A tornado severely damaged your barn. The adjusted basis of thebarn was $2,500. Your insurance company reimbursed you $4,000 for thedamaged barn. However, you had legal expenses of $200 to collect thatinsurance. Since your insurance minus your expenses to collect theinsurance is more than your adjusted basis in the barn, you have again. 1) Insurance reimbursement $4,000 2) Legal expenses       200 3) Amount received.Subtract line 2 from line 1 $3,800 4) Adjusted basis     2,500 5) Gain on casualty (line 3 - line4) $1,300