Calculation of Casualty/Theft Gains or Losses –

Once you have determined that you have an actual casualty or theft you must calculate the taxable effect of the event. These calculations are done on Form 4684 in Section A for personal use property, Section B for business/investment use property and Section C for Ponzi Scheme losses. It is possible to have a taxable gain on a casualty or theft. There are several pieces of information you will need to make these calculations regardless of the type of property.

1. Description of the property (type, location and acquisition date).
2. The type of event (casualty fire, hurricane, theft, etc.)
3. Date of the event.
4. Taxpayers adjusted basis in the property prior to the event.
5. FMV of the property immediately before the event.
6. FMV of the property after the event.
7. Any insurance payment, recovery or reimbursement received or expected to be received. This must be included whether a claim is filed or not. If the taxpayer could have filed a claim and chooses not to they must include what they would have been reimbursed.

The first step of the calculation is fairly simple, the taxpayers adjusted basis minus any reimbursement, insurance, or recovery. If the result is a negative number then the taxpayer has a gain on the event. If the result is a gain then the income is carried to the tax return based on the type of property it was generated from as indicated above.

If the result is a positive number then there is a possible loss.

Step 2 is to determine the difference in the FMV of the property before and after the event. This is your tentative loss.

Step 3 starts with the lessor of the results of the adjusted basis (before insurance) and step 2. All reimbursements, recovery, and insurance proceeds are subtracted from that number. This is your casualty or theft loss. Notice, I did not say your deductible loss.

After step three you must separate the events out into property type. If the property is personal use you will subtract $100 per event from the total and also subtract 10% of the taxpayer’s AGI from that result. If result is higher than $0 you have a deductible loss to carry to your Schedule A, line 20, Casualty and Theft losses.

If the property is business or investment use (other then Ponzi Scheme losses) the results of step 3 are not subject to the reductions/exclusions that personal use property are mandated. Once you determine the gain or loss from these types of property you must divide them between short-term and long term gains or losses.

The losses for investment type property, whether short term or long term, will be carried to the Schedule A, line 28, Miscellaneous deductions not subject to 2% of AGI.

Losses for employment use property will be carried either to the Form 2106 or Schedule A, line 23, Miscellaneous deductions Subject to 2% of AGI.

Losses from business or income producing type property will be carried to the Form 4797, line 14, Sales of Business property.

Example: John’s home area was hit by a tornado on 10/12/13. The barn adjacent to his home was totally destroyed. The barn was 15 years old at the time it was destroyed, and had an adjusted basis of $75,000 (including $7,500 land value). John’s AGI for 2013 is $32,000. The FMV of the barn before the tornado was $90,000 (including $9,000 land value) and the FMV afterward was $9,000 (including $9,000 land value). John received $10,000 from insurance for his loss.

How much of a gain/loss would John realize and where would it carry to, if the barn was used strictly for personal use?

Step 1: $75,000 (adj basis) – $10,000 (insurance proceeds) = $65,000

Step 2: $90,000 (FMV before) – $9,000 (FMV after value of land) = $81,000

Step 3: $75,000 (lessor of adj basis or step 2) – $10,000 (ins proceeds) = $65,000

Step 4: $65,000 – $100 (per event exclusion) = $64,900

Step 5: $64,900 – $3,200 (10% of AGI) = $61,700 deductible loss carries to the Schedule A, line 20.

How much of a gain/loss would John realize and where would it carry to if the barn had been used 100% for his farm business or was being used as strictly an investment property?

Step 1-3 are the same as above.

Step 4: $65,000 is carried to the Form 4797, line 14 for a use as a farm property or to Schedule A, Line 28 for use as an investment property.

Tomorrow, Ponzi Schemes

In accordance with Circular 230 Disclosure