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Losses Due To Theft And Casualty

Did you know if your business or personal assets are damaged or stolen the value of your loss may be deductible? Casualty losses typically result from damage or destruction to your property from sudden, unexpected events like fires, floods, hurricanes, earthquakes, etc. Theft is the illegal removal or taking of property, including money. Generally, these losses will be deductible on your Schedule C (business), or your Schedule A (personal) to the extent not covered by your insurance.

ARTIST

Steve is a self employed artist who owns a studio in Ferguson, Missouri. Recently, there was a violent rally that lead to the vandalism of Steve's studio. Steve estimates the damage to his studio to be approximately $5,000. To the extent Steve's insurance provider does not cover the loss he will be able to deduct the difference on line 27a of his Schedule C (limited to the decrease in the fair market value of the damaged property or his adjusted basis in the damaged property).

LANDLORD

Isaiah owns a rental property in Oklahoma with an adjusted basis (purchase price less accumulated depreciation) of $120,000 and fair market value of $180,000. Last month, a tornado touched down in proximity to his rental property and caused significant damages to the roof, the back porch, and the whole left side of his rental. After the tornado, the fair market value of his property was appraised at $40,000. When Isaiah calculates his deduction, even though the fair market value of his property declined by $140,000 his deduction will be limited to $120,000, his adjusted basis of his property before the casualty.

UBER DRIVER / RIDESHARE

On nights and weekends Emily works as an Uber driver to earn a little extra cash. Last week after a full day of driving she rear ended someone on her way home. Luckily her insurance provider covered all of the damage caused by the accident, which totaled $9,000. When emily prepares her tax return she will not be allowed to take any deduction for this accident on her Schedule C or her Schedule A since her loss was fully reimbursed by her insurance provider.

ENTREPRENEUR

Mr. Wilfred owns a food truck in New Orleans, Louisiana. His business was growing steady until a large hurricane struck in August and completely destroyed his vehicle. Mr. Wilfred's adjusted basis (purchase price less accumulated depreciation) in his vehicle was $9,000 and he lost another $6,000 in business in the weeks following the hurricane. His insurance company reimbursed him $7,000 for his vehicle. When Mr. Wilfred prepares his Schedule C he will be able to deduct $2,000 as a casualty loss (adjusted basis less insurance reimbursement), however, the $6,000 of lost business would not be a deductible business expense. Luckily for Mr. Wilfred, since the hurricane was declared a federal disaster he can deduct his $2,000 casualty loss on his prior year return, and since Mr. Wilfred had requested an extension to file his prior year taxes in October, he won't have to wait long to take this deduction.

AIRBNB HOST

Agusta is an Airbnb host who rents the guesthouse in her backyard to visitors on a full-time basis. Last year, the guesthouse was broken into and furniture, electronics and appliances with a $12,000 adjusted basis were stolen. Unfortunately, Agusta's insurance company denied her claim since she was using her property as a "rental". When Agusta prepares her taxes at the end of the year, she should complete Form 4684 and report the $12,000 of loss on line 19 of her Schedule E.

WHAT TO KNOW ABOUT CASUALTY AND THEFT LOSSES

  • Not all casualty and theft losses are deductible. Disallowed casualty losses include but are not limited to lost property, progressive deterioration of property, arson (by you or someone you paid) and car accidents caused by negligence or on purpose. Disallowed theft losses include but are not limited to a spouse who takes your property, property you are borrowing (if you have no basis in the property), and losses in the value of stock you own resulting from corporate fraud.
  • If you incur a casualty loss due to an event declared a "Federal Disaster" you may be able to take advantage of special tax provisions, including deducting your casualty loss in the prior year (i.e. disaster in March 2015 can be deducted in April 2015 when you file your 2014 return) and favorable treatment of certain disaster relief payments. Refer to IRS links below for additional details.
  • If you receive an insurance reimbursement for a theft or casualty loss that is more than expected, generally, you are required to recognize the excess proceeds as income. If the reimbursement is less than expected, you can deduct the difference between the reimbursement and your loss.
  • If your damaged or stolen property is covered by insurance you must file a claim for any unreimbursed loss to be deductible. In other words, you cannot actively choose not to file a claim in order to increase your potential tax deduction.
  • Be sure you have documentation to support your ownership, basis and the fair market value of the property lost due to casualty or theft. Examples include but are not limited to receipts showing the original purchase price of your property, deeds and / or titles that show you have a legal right to the property, and evidence that shows the FMV of the property like an appraisal or insurance record.

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