Fair market value (FMV) is the price at which property would be sold between a willing buyer and a willing seller, each having knowledge of all relevant facts and neither being under any compulsion to buy or sell. In the context of casualty or theft losses, FMV is used to determine the decrease in value of property due to the event. The decrease in FMV is calculated as the difference between the property’s FMV immediately before and immediately after the casualty or theft.
Key Points About FMV for Casualty and Theft Losses
- FMV After Theft: If property is stolen and not recovered, its FMV after the theft is considered zero.
- Appraisal Requirement: FMV is generally determined by a competent appraisal. The appraiser must consider comparable property sales around the time of the casualty or theft, as well as the condition of the property before and after the event.
- Adjustments for Market Decline: Any general decline in market value due to broader area-wide factors (e.g., neighborhood decline from repeated disasters) must be excluded from the loss calculation. Only actual damage to the property is considered.
- Repair Costs as Evidence: While replacement cost or repair costs are not necessarily FMV, they may be used as evidence of loss if repairs are actually made, necessary to restore the property to its pre-casualty condition, not excessive, and do not increase the property’s value beyond its pre-casualty value.
- Real Estate Considerations: For personal-use real estate (not used in a trade or business), the loss is measured for the property as a whole, including all improvements (e.g., buildings, trees, shrubs). Other items (e.g., furniture) are figured separately.
Safe Harbor Methods for Personal Belongings
- De Minimis Method: For losses of $5,000 or less, taxpayers may use a good-faith estimate of the decrease in FMV. Records must be kept describing the affected items and the methodology used.
- Replacement Cost Safe Harbor: Available for federally declared disasters, this method allows using the cost to replace damaged personal belongings as an estimate of loss.
Source:
Publication 547 (2025)
Form 4684 (2025)
Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.