Chapter 18

Casualty and Theft Losses and Involuntary Conversions

All casualty and theft losses are claimed on Form 4684. The tax treatment of an unreimbursed casualty or theft loss depends on the purpose for which you held the damaged, destroyed, or stolen property. A loss of property held for:

• Personal purposes is subject to the sudden events test (18.1) and a dollar floor (18.12) that reduces the deduction by $100. In addition, net losses for all personal-use assets are reduced by 10% of your adjusted gross income on Form 4684 (18.12). Because of the 10% floor, you may be unable to deduct a casualty or theft loss unless the loss is quite substantial.
• Income-producing purposes, such as negotiable securities, should be claimed on Form 4684 and then entered on Line 28 of Schedule A as an “other miscellaneous deduction” not subject to the 2% AGI floor (19.1).
• Business or rental purposes is claimed on Form 4684 and then as a loss on Form 4797. It is not subject to any floor or the sudden event test. Follow the instructions to Form 4684.

If you have realized a gain, you may defer tax by replacing or repairing the property (18.19).

Appraisal fees and other incidental costs, such as taking photos to establish the amount of the loss, are claimed as a miscellaneous itemized deduction subject to the 2% AGI floor on Line 23 of Schedule A, Form 1040.

18.1 Sudden Event Test for Casualty Losses

18.2 When To Deduct a Casualty Loss

18.3 Disaster Losses

18.4 Who May Deduct a Casualty Loss

18.5 Bank Deposit Losses

18.6 Damage to Trees and Shrubs

18.7 Deducting Damage to Your Car

18.8 Proving a Casualty Loss

18.9 Theft Losses

18.10 Proving a Theft Loss

18.11 Nondeductible Casualty and Theft Losses

18.12 Floors for Personal-Use Property Losses

18.13 Figuring Your Loss on Form 4684

18.14 Personal and Business Use of Property

18.15 Repairs May Be a “Measure of Loss”

18.16 Insurance Reimbursements

18.17 Excess Living Costs Paid by Insurance Are Not Taxable

18.18 Do Your Casualty or Theft Losses Exceed Your Income?

18.19 Defer Gain by Replacing Property

18.20 Involuntary Conversions Qualifying for Tax Deferral

18.21 How To Elect To Defer Tax

18.22 Time Period for Buying Replacement Property

18.23 Types of Qualifying Replacement Property

18.24 Cost of Replacement Property Determines Postponed Gain

18.25 Special Assessments and Severance Damages

18.26 Reporting Gains From Casualties