Figuring a Loss To determine your deduction for a casualty or theft loss, you mustfirst figure your loss. Amount of loss. You figure the amount of your loss using the following steps. Determine your adjusted basis in the propertybefore 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 youreceived or expect to receive. For personal-use property and property used in performingservices as an employee, apply the deduction limits, discussed later,to determine the amount of your deductible loss. Gain from reimbursement.If your reimbursement is more than your adjusted basis in theproperty, you have a gain. This is true even if the decrease in theFMV of the property is more than your adjusted basis. If you have again, you may have to pay tax on it, or you may be able to postponereporting the gain. See Figuring a Gain, later. Business or income-producing property. If you havebusiness or income-producing property, such as rental property, and itis stolen or completely destroyed, the decrease in FMV is notconsidered. Your loss is figured as follows: Formula Loss of inventory.You can claim a casualty or theft loss of inventory, includingitems you hold for sale to customers, through the increase in the costof goods sold by properly reporting your opening and closinginventories. 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 lossin gross income. You can choose to deduct the loss separately. If you deduct itseparately, eliminate the items from cost of goods sold by a downwardadjustment to opening inventory or purchases. Reduce the loss by thereimbursement you received. Do not include the reimbursement in grossincome. If you do not receive the reimbursement by the end of theyear, you may not claim a loss to the extent you have a reasonableprospect of recovery. Leased property. If you are liable for casualtydamage to property you lease, your loss is the amount you must pay torepair the property minus any insurance or other reimbursement youreceive or expect to receive. Separate computations. Generally, if a single casualty or theft involves more than oneitem of property, you must figure the loss on each item separately.Then combine the losses to determine the total loss from that casualtyor theft. 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. See the discussion for real property under Figuring theDeduction, later. Decrease inFair Market Value Fair market value (FMV)is the price for which you couldsell your property to a willing buyer when neither of you has to sellor buy and both of you know all the relevant facts. The decrease in FMV is the difference between the property's fairmarket value immediately before and immediately after the casualty oftheft. FMV of stolen property. The FMV of property immediately after a theft is considered to bezero 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 dollarswere stolen this year. The FMV of the coins was $1,000 when stolen,and insurance did not cover them. Your theft loss is $150. Recovered property.Recovered property is your property that was stolen and laterreturned to you. If you recovered property after you had already takena theft loss deduction, you must refigure your loss using the smallerof the property's adjusted basis (explained later) or the decrease inFMV from the time it was stolen until the time it was recovered. Usethis amount to refigure your total loss for the year in which the losswas deducted. If your refigured loss is less than the loss you deducted, yougenerally have to report the difference as income in the recoveryyear. But report the difference only up to the amount of the loss thatreduced your tax. For more information on the amount to report, seeRecoveries in Publication 525. Figuring Decrease in FMV -- Items To Consider To figure the decrease in FMV because of a casualty or theft, yougenerally need a competent appraisal. But, other measures can also beused to establish certain decreases. See Appraisal andCost of cleaning up or making repairs, next. Appraisal. The appraisal to determine the difference between the FMV of theproperty immediately before a casualty or theft and immediatelyafterwards should be made by a competent appraiser. The appraiser mustrecognize the effects of any general market decline that may occuralong with the casualty. This information is needed to limit anydeduction to the actual loss resulting from damage to the property. Several factors are important in evaluating the accuracy of anappraisal, including the following. The appraiser's familiarity with your property before andafter the casualty or theft. The appraiser's knowledge of sales of comparable property inthe area. The appraiser's knowledge of conditions in the area of thecasualty. The appraiser's method of appraisal. TaxTip: You may be able to use an appraisal that you used to get a federalloan (or a federal loan guarantee) as the result of a Presidentiallydeclared disaster to establish the amount of your disaster loss. Formore information on disasters, see Disaster Area Losses,later. Appraisal fee.The appraisal fee is not a part of the casualty or theft loss. Itis an expense in determining your tax liability. You can deduct yourappraisal fees as a miscellaneous itemized deduction subject to the2%-of-adjusted-gross-income limit on Schedule A (Form 1040). 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 take care of the damage only. The value of the property after the repairs is not, due tothe repairs, more than the value of the property before thecasualty. Landscaping.The cost of restoring landscaping to its original condition after acasualty may indicate the decrease in FMV. You may be able to measureyour loss by what you spend on the following. Removing destroyed or damaged trees and shrubs, minus anysalvage you receive. Pruning and other measures taken to preserve damaged treesand shrubs. Replanting necessary to restore the property to itsapproximate value before the casualty. Cars.Books issued by various automobile organizations that list your carmay be useful in figuring the value of your car. You can use thebooks' retail values and modify them by factors such as the mileageand condition of your car to figure its value. The prices are not"official," but they may be useful in determining value andsuggesting relative prices for comparison with current sales andofferings in your area. If your car is not listed in the books,determine its value from other sources. A dealer's offer for your caras a trade-in on a new car is not usually a measure of its true value. Figuring Decreases in FMV -- Items Not To Consider You generally should not consider the following items whenattempting to establish the decrease in FMV of your property. Cost of protection. The cost of protectingyour property against a casualty or theft is not part of a casualty ortheft loss. The amount you spend on insurance or to board up yourhouse against a storm is not part of your loss. If the property isbusiness property, these expenses are deductible as business expenses. If you make permanent improvements to your property to protect itagainst a casualty or theft, add the cost of these improvements toyour basis in the property. An example would be the cost of a dike toprevent flooding. 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 business expenses if thedamaged or stolen property is business property. Replacement costs. The cost of replacing stolen or destroyed property is not part of acasualty or theft loss. Example.You bought a new chair 4 years ago for $300. In April, a firedestroyed the chair. You estimate that it would cost $500 to replaceit. If you had sold the chair before the fire, you estimate that youcould have received only $100 for it because it was 4 years old. Thechair was not insured. Your loss is $100, the FMV of the chair beforethe fire. It is not $500, the replacement cost. Sentimental value.Do not consider sentimental value when determining your loss. If afamily portrait, heirloom, or keepsake is damaged, destroyed, orstolen, you must base your loss only on its fair market value. Decline in market value of property in or near casualty area.A decrease in the value of your property because it is in or nearan area that suffered a casualty, or that might again suffer acasualty, is not to be taken into consideration. You have a loss onlyfor actual casualty damage to your property. However, if your home isin a federally declared disaster area, see Disaster Area Losses,later. Photographs.Photographs taken after a casualty will be helpful in establishingthe condition and value of the property after it was damaged.Photographs showing the condition of the property after it wasrepaired, restored, or replaced may also be helpful. The cost of photographs obtained for this purpose is not a part ofthe loss. It is an expense in determining your tax liability. You canclaim this cost as a miscellaneous itemized deduction subject to the2%-of-adjusted-gross-income limit on Schedule A (Form 1040). Adjusted Basis The measure of your investment in the property you own isbasis. For property you buy, your basis is usually its costto you. For property you acquire in some other way, such as inheritingit, 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, increasebasis. Others, such as earlier casualty losses and depreciationdeductions, decrease basis. When you add the increases to the basisand subtract the decreases from the basis, the result is youradjusted basis. See Publication 551 for more information onfiguring the basis of your property. Insurance andOther 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. 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. See Reimbursement Received After Deducting Loss,later. Failure to file claim for reimbursement.If your property is covered by insurance you should file a timelyinsurance claim for reimbursement of your loss. Otherwise, you cannotdeduct this loss as a casualty or theft. The portion of the loss usually not covered by insurance (forexample, a deductible) is not subject to this rule. Example.You have a car insurance policy with a $500 deductible. Becauseyour insurance did not cover the first $500 of an auto collision, the$500 would be deductible (subject to the $100 and 10% rules discussedlater). This is true, even if you do not file an insurance claim,because your insurance policy would never have reimbursed you for thedeductible. Types of Reimbursements The most common type of reimbursement is an insurance payment foryour stolen or damaged property. Other types of reimbursements arediscussed next. Also see the instructions for Form 4684. Employer's emergency disaster fund.If you receive money from your employer's emergency disaster fundand you must use that money to rehabilitate or replace property onwhich you are claiming a casualty loss deduction, you must take thatmoney into consideration in computing the casualty loss deduction.Take into consideration only the amount you used to replace yourdestroyed or damaged property. Example.Your home was extensively damaged by a tornado. Your loss afterreimbursement from your insurance company was $10,000. Your employerset up a disaster relief fund for its employees. Employees receivingmoney from the fund had to use it to rehabilitate or replace theirdamaged or destroyed property. You received $5,000 from the fund andspent the entire amount on repairs to your home. In figuring yourcasualty loss, you must reduce your unreimbursed loss ($10,000) by the$5,000 you received from your employer's fund. Your casualty lossbefore applying the deduction limits discussed later is $5,000. Cash gifts.If you receive excludable cash gifts as a disaster victim and thereare no limits on how you can use the money, you do not reduce yourcasualty loss by the amount of the excludable cash gifts. This applieseven if you use the money to pay for repairs to property damaged inthe disaster. Example.Your home was damaged by a hurricane. Relatives and neighbors madecash gifts to you that were excludable from your income. You appliedpart of the cash gifts to the cost of repairing your home. There wereno limits or restrictions on how you could use the cash gifts. Themoney you received as excludable gifts and used to pay for repairs toyour home does not reduce the amount of your casualty loss on thedamaged home. Insurance payments for living expenses.You do not reduce your casualty loss by insurance payments youreceive to cover living expenses in either of the followingsituations. You lose the use of your main home because of acasualty. Government authorities do not allow you access to your mainhome because of a casualty or threat of a casualty. Inclusion in income.If these insurance payments are more than the temporary increase inyour living expenses, you must include the excess in your income.Report this amount on line 21 of Form 1040. A temporary increase in your living expenses is the differencebetween the actual living expenses you and your family incurred duringthe period you could not use your home and your normal living expensesfor that period. Actual living expenses are the reasonable andnecessary expenses incurred because of the loss of your main home.Generally, these expenses include the amounts you pay for thefollowing. Renting suitable housing Transportation Food Utilities Miscellaneous services Normal living expenses consist of these same expenses that youwould have incurred but did not because of the casualty. Example.As a result of a fire, you vacated your apartment for a month andmoved to a motel. You normally pay $525 a month rent. None was chargedfor the month the apartment was vacated. Your motel rent for thismonth was $1,200. You normally pay $200 a month for food. Your foodexpenses for the month you lived in the motel were $400. You received$1,100 from your insurance company to cover your living expenses. Youdetermine the amount of the payment you must include in income asfollows. 1) Insurance payment for living expenses $1,100 2) Actual expenses during the month you are unableto use your home because of the fire $1,600 3) Normal living expenses        725 4) Temporary increase inliving expenses: Subtract line 3from line 2        875 5) 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 forthe year you regain the use of your main home, or if later, for theyear you receive the taxable part of the insurance payment. Example.Your main home was destroyed by a tornado in August 1997. Youregained use of your home in November 1998. The insurance payments youreceived in 1997 and 1998 were $1,500 more than the temporary increasein your living expenses during those years. You include this amount inincome on your 1998 Form 1040. If, in 1999, you receive furtherpayments to cover the living expenses you had in 1997 and 1998, youmust include those payments in income on your 1999 Form 1040. Disaster relief.Food, medical supplies, and other forms of assistance you receivedo not reduce your casualty loss, unless they are replacements forlost or destroyed property. They also are not taxable income to you. Disaster unemployment assistance payments are unemployment benefitsthat are taxable. Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using your expectedreimbursement, you may have to adjust your tax return for the tax yearin which you get your actual reimbursement. This section explains theadjustment you may have to make. 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. Example.Your personal car had an FMV of $2,000 when it was destroyed in acollision with another car last year. The accident was due to thenegligence of the other driver. At the end of the year, there was areasonable prospect that the owner of the other car would reimburseyou in full. You did not have a deductible loss last year. This January, the court awards you a judgment of $2,000. However,in July it becomes apparent that you will be unable to collect anyamount from the other driver. Since this is your only casualty ortheft loss, you can deduct the loss this year that is more than $100and 10% of this year's adjusted gross income. Actual reimbursement more than expected.If you later receive more reimbursement than you expected, afteryou have 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 the original deduction did not reduce your taxfor the earlier year, do not include that part of the reimbursement inyour income. You do not refigure your tax for the year you claimed thededuction. See Recoveries in Publication 525 to find outhow much extra reimbursement to include in income. Example.Last year, a hurricane destroyed your motorboat. Your loss was$3,000, and you estimated that your insurance would cover $2,500 ofit. Since you did not itemize deductions on your return last year, youcould not deduct the loss. When the insurance company reimburses youfor 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 notdeduct the loss on your return. The loss did not reduce your tax. 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. You may be ableto postpone reporting any remaining gain as explained underPostponement 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 todeduct. Example.Last December, you had a collision while driving your personal car.Repairs to the car cost $950. You had $100 deductible collisioninsurance. Your insurance company agreed to reimburse you for the restof the damage. As a result of your expected reimbursement from theinsurance company, you did not have a casualty loss deduction lastyear. Due to the $100 rule, you cannot deduct the $100 you paid as thedeductible. When you receive the $850 from the insurance company thisyear, you do not report it as income.