Saturday, January 12, 2013

Casualty Loss Deduction Section 165

Casualty Losses – Only Personal Loss Deduction Allowed

§ 165(a) – Losses incurred in a trade or business, or in activities engaged in for profits, are generally deductible. POLICY: The usual justification is that income tax should reach only the net income from business and profit-seeking activities, not gross receipts from those activities. 

§ 262(a) provides a general casualty loss rule that no deduction shall be allowed “for personal living, or family expenses” The tax rules disallowing for deductions for gradual loss in wealth in effect presume conclusively that the amount by which the value of an asset is diminished over time is itself the best measure of the consumption value enjoyed by the taxpayer over the same period.

§ 165(c)(3) will allow you to claim a casualty loss deduction.

Casualty Loss Requirements:

A deductible casualty loss has had to be a SUDDEN and somewhat dramatic event. § 165(c)(3) – FIRE, STORM, SHIPWRECK. OTHER CASUALTY, OR THEFT, SOMETHING SUDDEN

§ 165(h)(1) - Even if the property damage is a result of an acceptable sort of casualty, a casualty loss deduction is allowed only if and to the extent that the taxpayer’s loss exceeded $100.

§ 165(h)(2) which provides that the total amount of a taxpayer’s casualty losses for the year is deductible only to the extent is exceeds 10% of the taxpayer’s AGI in the same year. Sometimes specific exceptions to waive rules.

§ 165(h)(2)(B)- If the casualty gains exceed casualty losses, the gains are treated as capital gains and the losses are treated as capital losses.

Steps for Calculating the Deductions – Lesser of Adjusted Basis or Loss! 


  1. For each piece of property damaged, begin with FMV of the property before casualty.
  2. Subtract the value of the property after the casualty.
  3. Compare the result with the adjusted basis of the property, taking the lesser of the two numbers as the tentative casualty loss.
  4. Subtract the amount of any recoveries from tortfeasors or insurance coverage.
  5. Once that process is complete for each piece of property damaged in the casualty, the tentative casualty losses are added; and 
  6. Casualty gains if any, and statutory $100 deductible are subtracted for each casualty,
  7. If the taxpayer suffered more than one casualty, the steps above must be repeated for each piece of property in each additional casualty suffered. 
  8. Once the gains and loses from each casualty are computed, the taxpayer adds them together, then subtracts 10 percent of AGI. 1. That is the amount allowed for the deduction. 2. Check to see if this is bigger than the standard deduction.




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