When reporting a casualty or theft loss on Form 4684, your cost or adjusted basis of the property is a key factor in determining your deductible loss. The basis is generally the original purchase price of the property, including sales tax, shipping, and installation costs. For personal-use property, this is typically the amount you paid to acquire the item, adjusted for certain increases or decreases (such as improvements or prior depreciation, if applicable).
Adjustments to Basis
Before calculating your loss, you must determine your adjusted basis immediately before the casualty. This includes increases for capital improvements and reductions for depreciation (if applicable). Insurance or other reimbursements are not used to adjust basis when computing the loss, but are subtracted after determining the loss amount. Repairs that merely restore the property to its original condition do not increase basis.
Figuring the Loss
To determine your casualty or theft loss, compare:
- Adjusted basis (original cost minus any prior depreciation or adjustments)
- Decrease in fair market value (FMV) (the difference between FMV before and after the casualty)
Use the smaller of these two amounts, then subtract any insurance or other reimbursement you received or expect to receive. This results in the preliminary loss.
Deduction Limits for Personal-Use Property
For tax years after 2017, personal casualty and theft losses are deductible only if attributable to a federally declared disaster. These losses are generally subject to a $100 reduction per casualty and a 10% of adjusted gross income (AGI) limitation. For certain qualified disaster losses, a $500 reduction may apply and the 10% AGI limitation may be waived, depending on applicable law.
Special Methods for Determining Loss
The IRS allows safe harbor methods for determining the decrease in FMV for personal-use residential real property:
- Estimated repair cost method: Use the lesser of two independent contractor repair estimates, subject to IRS limitations.
- De minimis method: Use a reasonable written good-faith estimate for losses of $5,000 or less.
Source:
Form 4684
Publication 547
Disclaimer: Always verify details with the current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.