18.13 Figuring Your Loss on Form 4684
Form 4684 is used to report casualties or thefts of personal-use property, business property, or income-producing property. The deductible loss is usually the difference between the fair market value of the property before the casualty or theft and the fair market value after the casualty or theft but this loss in value must be reduced by (1) reimbursements received for the loss and (2) if the property was used for personal purposes, by the $100 floor (18.12). However, the loss may not exceed your adjusted basis (5.20) for the property, which for many items will be your cost. If your adjusted basis is less than the loss in value, your deduction is limited to basis, less reimbursements and the $100 floor for personal-use assets. After figuring all allowable casualty and theft losses and gains for personal-use property, the net loss (losses in excess of gains if any) is deductible only to the extent it exceeds the 10% adjusted gross income (AGI) floor (18.12).
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Filing Instruction
Reporting Losses From Personal-Use Property on Form 4684
If you are claiming a loss for personal-use property, use Section A on page 1 of Form 4684. If you suffered more than one casualty or theft of personal-use property during the year, use a separate Form 4684 for each one and make the calculations through Line 12. The amounts from the separate Forms 4684 should be combined on a single Form 4684. If there is a net loss for the year after applying the 10% AGI floor, it is entered on Line 20, Schedule A (Form 1040) as your casualty/theft loss deduction.
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Steps for calculating your deductible loss for 2012.
The following five steps reflect the procedure on Form 4684 for computing a casualty or theft loss. If your loss is to business inventory, you do not have to use Form 4684, but may take the loss into account when figuring the cost of goods sold; see “Inventory losses” later in this section.
To figure your deductible loss, follow these five steps:
Step 1. Compute the loss in fair market value of the property. This is the difference between the fair market value immediately before and immediately after the casualty. You do not have to compute the loss in fair market value for business or income-producing property (such as a rental property) that has been completely destroyed or stolen; go to Step 2.
You will need written appraisals to support your claim for loss of value. You may
not claim sentimental or aesthetic values or a fluctuation in property values caused by a casualty; you must deal with cost or market values of what has been lost. If the value of your property has been lowered because of damage to a nearby area, you do not have a deductible loss since your own property has not been damaged. No deduction may be claimed for estimated decline in value based on buyer resistance in an area subject to landslides.
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Filing Tip
Appraisals for Disaster Relief
The IRS may accept an appraisal that is used to obtain federal loans or loan guarantees following a federally declared disaster as proof of the amount of a casualty loss.
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For household items, the Tax Court has allowed losses based on cost less depreciation, rather than on the decrease in fair market value.
Step 2. Compute your adjusted basis (5.20) for the property. This is usually the cost of the property plus the cost of improvements, less previous casualty loss deductions and depreciation if the property is used in business or for income-producing purposes. Unadjusted basis of property acquired other than by purchase is explained at 5.16.
Step 3. Take the lower amount of Step 1 or 2. For business or income-producing property that was stolen or completely destroyed, reduce adjusted basis from Step 2 by any salvage value.
Step 4 Reduce the loss in Step 3 by the insurance proceeds or other compensation for the loss (18.16). This is your deductible loss for business or income-producing property. If the loss was on property used for personal purposes, apply the reductions in Step 5.
If the insurance or other compensation exceeds your adjusted basis for the property, you have a taxable gain rather than a deductible loss. You may be able to defer the gain by buying replacement property (18.19).
Step 5. If you had only one 2012 casualty or theft loss and the property was used for personal purposes, the loss from Step 4 must be reduced by the $100 floor and any balance is deductible only to the extent it exceeds 10% of your adjusted gross income. If you have more than one personal casualty or theft loss, you must reduce each loss by the $100 floor and the net loss (total losses exceeding total gains if there any gains) is deductible only to the extent it exceeds the 10% AGI floor.
EXAMPLES
1. Your home, which cost $76,000 in 1979, was damaged by a fire in 2012. The value of the house before the fire was $217,500, but afterwards $202,500. Furniture that cost $5,000 in 1990 and was valued at $2,500 before the fire was totally destroyed. The insurance company reimbursed you $10,000 for your house damage and $1,000 for your furnishings. This was the only casualty for the year. Your adjusted gross income is $48,000. You figure your loss for the furniture separately from the loss on the house but apply only one dollar floor because the damage was from a single casualty.
| 1. Decrease in home’s fair market value: |
|
| Value of house before fire |
$217,500 |
| Value of house after fire |
202,500 |
| Decrease in value |
$15,000 |
| 2. Adjusted basis: |
$76,000 |
| 3. Loss sustained (lower of 1 or 2) |
$15,000 |
| Less: Insurance |
10,000 |
| Loss on house |
$5,000 |
| 4. Loss on furnishings (decreased value)* |
$2,500 |
| Less: Insurance |
1,000 |
| Loss on furnishings |
$1,500 |
| 5. Total loss ($5,000 and $1,500) |
$6,500 |
| Less: $100 floor |
100 |
| Casualty loss (subject to 10% floor) |
$6,400 |
| 6. 10% AGI floor (10% of $48,000 AGI) |
$4,800 |
| 7. Casualty loss ($6,000 − $4,800) |
$1,600 |
2. Depreciable business property with a fair market value of $1,500 and an adjusted basis of $2,000 is totally destroyed. Because property used in your business was totally destroyed (see Step 3 (18.13)), your loss is measured by your adjusted basis of $2,000, which is larger than the $1,500 loss in fair market value. Salvage value, if any, reduces your deduction, but you disregard the $100 floor which applies only to casualty losses on personal property. If the property was used for personal purposes, the loss would have been limited to the $1,500 loss in market value less $100, leaving a loss of $1,400 subject to the 10% adjusted gross income floor.
Business losses.
Losses from business property are generally netted against gains from casualties or thefts on Form 4684 and the net gain or loss is entered on Form 4797. Follow the instructions to Form 4684.
Inventory losses.
A casualty or theft loss of inventory is automatically reflected on Schedule C in the cost of goods sold, which includes the lost items as part of your opening inventory. Any insurance or other reimbursement received for the loss must be included as sales income.
You may separately claim the inventory loss as a casualty or theft loss on Form 4684 instead of automatically claiming it as part of the cost of goods sold. If you do this, you must eliminate the items from inventory by lowering either opening inventory or purchases when figuring the cost of goods sold.
Cost less depreciation method for household items.
The Tax Court has allowed casualty loss deductions based on cost less depreciation, rather than on the difference in fair market value immediately before and after the casualty. See the following Example.
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Filing Tip
Business or Income-Producing Property
If you are claiming a loss for property used in your business or income-producing activity, use Section B on page 2 of Form 4684. Losses from income-producing property are entered on Line 28 of Schedule A as “other miscellaneous deductions” and are not subject to the 2% adjusted gross income floor.
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EXAMPLE
Basing a deduction on the difference between the value of furnishings immediately before and immediately after a casualty may limit your deduction to the going price for secondhand furnishings. A homeowner whose furniture was destroyed by fire claimed that the fair market value immediately before the fire should be original cost less depreciation. He based his figures on an inventory prepared by certified public adjusters describing each item, its cost and age. The deduction figured this way came to approximately $27,500 ($55,000 cost, less $13,000 depreciation, a $14,400 insurance recovery, and the $100 floor).
The IRS estimated that the furniture was worth $15,304 before the fire and limited the deduction to $804 after accounting for the insurance and the then-$100 floor. The Tax Court disagreed. The householder’s method of valuing his furniture is consistent with methods used by insurance adjusters who have an interest in keeping values low. He is not limited to the amount his property would bring if “hawked off by a secondhand dealer or at a forced sale.” However, in another case, the court refused to allow the cost less depreciation formula where the homeowner’s inventory list was based on memory.
