18.15 Repairs May Be a “Measure of Loss”

The cost of repairs may be treated as evidence of the loss of value (Step 1 (18.13)), if the amount is not excessive and the repairs do nothing more than restore the property to its condition before the casualty. An estimate for repairs will not suffice; only actual repairs may be used as a measure of loss. However, where you measure your loss by comparing appraisals of value for before and after the casualty, repairs may be considered in arriving at a post-casualty value even though no actual repairs are made.

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image Planning Reminder
Keep Records of Deductible Losses
If your property is damaged, you must reduce the basis of the damaged property by the casualty loss deduction and compensation received for the loss (5.20). When you later sell the property, gain or loss is the difference between the selling price and the reduced basis.
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Deduction not limited to repairs.

A casualty loss deduction is not limited to repair expenses where the decline in market value is greater, according to a federal appeals court; see the following Example.


EXAMPLE
Connor claimed that the market value of his house dropped $93,000 after it was damaged by fire. His $52,000 cash outlay in repairing the house was reimbursed by insurance. He claimed a casualty loss of approximately $40,000, the uncompensated drop in market value. The IRS barred the deduction. The house was restored to pre-casualty condition. The cost of the repairs is a realistic measure of the loss, and, as the expense was fully compensated by insurance, Connor suffered no loss. A federal appeals court disagreed. The house dropped $70,000 in market value, of which $20,000 was uncompensated by insurance. The deduction is measured by the uncompensated difference in value before and after the casualty. It is not limited to the cost of repairs, even where the repair expense is less than the difference in fair market values. Had the repairs cost more than this difference, the IRS would not have allowed a larger deduction.

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image Caution
Failure To Make an Insurance Claim
If you are insured for your full loss and do not file a claim because you do not want to risk cancellation of liability coverage, you may not claim a deduction. If you do not file an insurance claim but your loss exceeds the coverage, the noncovered loss may be deductible. For example, if you have a $2,500 deductible on your personal automobile insurance policy, a loss of up to $2,500 would be reduced by the $100 floor and the balance would be deductible only to the extent the 10% of adjusted gross income floor was exceeded; see Step 5 (18.13).
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