Eligible Casualty Events

• The casualty deduction serves as an exception to the general rule that losses to personal property are nondeductible, though the casualty loss deduction also covers your investment property. However, eligibility to claim a casualty loss deduction requires that the loss be the direct result of an event that is sudden, unexpected or unusual in nature, such as a tornado or other storm. Moreover, the IRS will not allow you to benefit from the deduction and will disallow it if your insurance company reimburses you for the loss.
  
  

Calculating Property Loss

• The IRS requires that you calculate your loss using a specific method. However, the loss you calculate will not be the same as your deductible amount. The first step is to determine your basis in the property. For example, if the damage occurs to your car, your basis is the purchase price. Next, you need to evaluate the decrease in its fair market value from the damage. This will be different from the tax basis of the car. To illustrate, suppose you purchase a new car for $20,000 in 2009 and in 2011, immediately prior to the casualty event, you can sell it for $15,000. If the damage to your car requires $1,000 worth of repairs, this will equal the decrease in the car's value since a buyer who purchases the car as-is will only pay $14,000 for it. For purposes of calculating your deduction, the property loss is equal to the lesser of your $15,000 tax basis or the $1,000 decrease in value. Therefore, your loss is $1,000.
  
  

Deductible Amount

• Once you calculate the appropriate amount of your property loss, you must reduce it by $100. This $100 reduction applies to the total loss, not each specific repair that is necessary. Therefore, your deductible loss is equal to $900. However, you must reduce the loss again by 10 percent of your Adjusted Gross Income (AGI). This means that if your AGI is $9,000 or more, your deduction is reduced to zero since 10 percent of $9,000 equals $900. But if your AGI is equal to $7,000, you reduce the loss by $700, leaving you with a $200 deduction.
  
  

Tax Reporting Implications

• The IRS requires you to report the calculation of your loss deduction on Form 4684 as an attachment to your tax return. However, if the loss relates to personal property, such as your home or car, you must also report the amount on Schedule A, which requires that you itemize deductions to claim it. But if the loss relates to investment property, Schedule A reporting isn't necessary.