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Taking a Tax Deduction for a Casualty or Theft 
by kmhagen July 05, 2005

Insurance Reimbursements

You reduce your loss by the amount of the insurance you expect to receive, even if you do not actually receive the insurance reimbursement until the following year.  If your property is insured, you must file a timely insurance claim; otherwise your loss is not deductible.  But this does not apply to a deductible, which you would not be able to recover anyway.  For example, if your car is damaged and you do not file an insurance claim, you could still claim a loss for the amount of the deductible.

If you receive insurance reimbursement the following year, and it turns out to be less than the expected amount of insurance reimbursement you reported when you originally claimed the deduction for the casualty loss, you can include the difference with any other casualty losses you may have for the year you actually received the reimbursement.  If your insurance reimbursement was more than you reported as expected, you may have to include the excess in your income as a recovery in the year you receive it.  But if the related casualty loss did not reduce your taxable income in the year the casualty occurred, you do not need to report the excess reimbursement.  For example, if you had a casualty loss but did not itemize deductions that year, you had no tax benefit from the loss and you do not need to report the insurance reimbursement.

If the total of all reimbursements you receive for the casualty loss, including insurance, is more than the adjusted basis of the property, you have a gain.  If you had already taken a deduction for a casualty loss in a prior year, you will have ordinary income to report for the portion of the gain that corresponds to the amount you previously deducted.  You may be able to postpone the remainder of the gain, if any.  Postponement of gains is discussed below.

If the insurance reimbursement the following year is the same as what you reported as the expected reimbursement, you do not have any income or deduction to report when you receive the reimbursement.

Separate Items of Property

Form 4684 provides different columns to report different individual items of property involved in a casualty or theft.  You determine the loss on each item separately, and then combine them to determine the total loss from that casualty or theft.  But if real property used for personal purposes was affected by the casualty, the entire property including buildings, trees, and landscaping is treated as one item.  In this case, the loss is the lesser of the decrease in the fair market value of the entire property, or the adjusted basis of the entire property.

If you have more than one casualty or theft to report, you should use a separate Form 4684 to report each event.

Leased Property

If the casualty damaged property that you are leasing, your loss is the amount you are contractually obligated to pay to repair the property, less any insurance or other reimbursement.

Business or Income-producing Property

If a casualty results in the complete loss of property you held in your business or for producing income, such as rental property, the decrease in the property’s fair market value is not taken into consideration in calculating your loss.  In this case you calculate your loss by taking your adjusted basis in the property, subtracting any salvage value and any insurance or other reimbursement.

If the casualty affects inventory you hold for your business, you can deduct the loss as part of your cost of goods sold calculation.  Or you can deduct the loss separately as a casualty loss,  In the latter case you would need to remove the affected items from your cost of goods sold calculation by making an adjustment to reduce opening inventory or purchases,

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