Chapter 7. Losses-Deductions and Limits-2013

T13F-Chp-07-1-Losses-Deductions and Limits-2013

Part 1. IntroductionPart 2. Annual Losses Trade or Business,

Rental ActivitiesPart 3. Losses, Loss Carryovers NOL, Tax Shelters (Passive Losses) Part 4. Trade or Business Losses

Operating losses, Business casualty or theft losses

Part 5. Investment related losses Capital losses (individuals and corp), Small business stock, Related party losses, Wash sales

Part 6. Losses on Personal use items (Casualties)

Annual Losses Summary

Net Op. Losses Acct Methods

Shelters-Overview Net Op. Loss

At-Risk Rules At-Risk limits

Passive Activity Passive Losses

Transaction Loss Casualty & Theft

Trade or Bus Loss Invest.-Losses

Investment Losses 1244 losses

Losses: Deductions, Limits.

Definition of Losses• Annual (Activity) Losses

result when an entity’s deductions for the period exceed its income

• Transaction Losses result from disposition of an asset

Realized loss

Annual loss Transaction loss

Trade orbusiness

loss

Trade orbusiness

loss

PassiveActivity

NOLdeduction

Loss allowedor loss

deductionsuspended

Ordinaryloss

Capital loss

limitations

Non-deductible

Investment-related

loss

Personaluseloss

Figure 7-1

General Scheme for Treatment of Losses

Annual Loss

Trade or Bus.Rental Prop.

Loss CarryoversNOLShelter Losses At-RiskPassive LossesActive particpation

Annual Losses: Net Operating Loss• Incurred in trade or business operations

– Caused by business expenses– May not be caused by investment or personal

expenses

• Treatment– No tax in year NOL occurs– Carry-back 2 years (But consider 2009 law)– Carry-forward unused NOL 20 years

• May elect to forego carry-back

Owner of C Corp. has asked for advice.Corporation was started in 2011

Actual Actual Actual Plan

Amounts ($000) 2011 2012 2013 2014

Revenue $100 $200 $200 $300

Expenses (98) (173) (225) (225)

Taxable income (loss) $2 $27 ($25) $75

1. Can the corp. benefit from the loss in 2013?

2. Is there a choice regarding the 2013 loss?

3. Compute the savings under two options.

4. How do you apply present value methods here?

Annual Losses: Tax Shelter LossesTax shelters are activities designed

to minimize the effect of tax on wealth accumulation.

Dominant business purpose is lacking• Primary motivation is tax reduction• Are often vehicles for tax law abuse

Building bought on 1/1/Yr 1Cost 1/1/Yr-1 $400,000 RentalMort 10% $400,000 Office Annual Deprec. Expense $10,000 BuildingAnnual insurance & exp. $15,000Value 1/1/Yr-1 $400,000Value 12/31/Yr-1 $500,000

Rental income

Per Year

Charlotte Corporation

$60,000

Study the information given on the building on the preceding page. Assume the owner only pays interest on the mortgage.What is gain or loss on sale of the building, if it is sold on 1-1-Yr2, for $500,000?What happens to the taxable loss from Yr 1? We will also consider what happens if the value of the building declines over the period of ownership. You can lose from operations and from selling the property for less than basis.

T/P buys Rental Building on 1-1-Yr-1 Cost 1/1/Yr-1 $400,000 Mortgage 10% $400,000 Value of Build. 1/1/Yr-1 $400,000 Value of Build. 12/31/Yr-1 $500,000 Rent Revenue Depreciation Interest Expense Taxes,insurance Taxable Income (loss) Economically - Is there a loss?What is gain on sale of building, if it is sold on 1-1-Yr2, for $500,000?

T/P buys Rental Building on 1-1-Yr-1 Cost 1/1/Yr-1 $400,000 Mortgage 10% 400,000 Value of Build. 1/1/Yr-1 400,000 Value of Build. 12/31/Yr-1 500,000 Rent Revenue $60,000 Depreciation (10,000) Interest Expense (40,000) Taxes,insurance (15,000) Taxable Income (loss) ($5,000) Economically - Is there a loss?What is gain on sale of building, if it is soldon 1-1-Yr2, for $500,000? (No Yr2 deprec.)

Assume Taxpayer owns the building for exactly 4 years and in each year the income statement looks like the one on the preceding slide.After 4 years (12-31-Yr-4), Taxpayer sells the building for $350,000.Taxpayer has been paying interest only.What is the gain or loss on the building?What happens to 4 years of losses?

Yr-1 Yr-2 Yr-3 Yr-4

Rent Revenue $60,000 $60,000 $60,000 $60,000

Depreciation (10,000) (10,000) (10,000) (10,000)

Interest Expense (40,000) (40,000) (40,000) (40,000)

Taxes, insurance (15,000) (15,000) (15,000) (15,000)

Loss(Suspended) ($5,000) ($5,000) ($5,000) ($5,000)

Building Basis $390,000 $380,000 $370,000 $360,000

What is total cash inflow (after expenses) in 4 years?

T/P sells building for $350,000 at end of Yr. 1.

T/P Sells Rental Build. on 12-31-Yr-4

Cost 1/1/Yr-1 $400,000

Accum. Deprec. ($40,000)

Book Value 12/31/Yr-4 $360,000

Selling Price $350,000

Loss-sale of Bldg. 12/31/Yr-4

Operating loss Year - 4

Suspended Loss Three yrs.

Total loss

T/P Sells Rental Build. on 12-31-Yr-4

Cost 1/1/Yr-1 $400,000

Accum. Deprec. ($40,000)

Book Value 12/31/Yr-4 $360,000

Selling Price $350,000

Loss-sale of Bldg. 12/31/Yr-4 ($10,000)

Operating loss Year - 4 ($5,000)

Suspended Loss Three yrs. ($15,000)

Total loss ($30,000)

T/P Sells Rental Build. on 12-31-Yr-4

Four Year Cash Flow AnalysisAnnual revenueSelling price

Cash inflowsInterest ExpenseTaxes, InsuranceCost of property

Cash outflowsExcess outflow

T/P Sells Rental Build. on 12-31-Yr-4

Four Year Cash Flow AnalysisAnnual revenue $240,000Selling price 350,000

Cash inflows 590,000Interest ExpenseTaxes, InsuranceCost of property

Cash outflowsExcess outflow

T/P Sells Rental Build. on 12-31-Yr-4

Four Year Cash Flow AnalysisAnnual revenue $240,000Selling price 350,000

Cash inflows 590,000Interest Expense (160,000)Taxes, Insurance (60,000)Cost of property (400,000)

Cash outflows (620,000)Excess outflow ($30,000)

Tax Shelter Losses-At-Risk Rules• At-Risk Rules disallow the deduction of

artificial losses– Loss deduction limited to amounts actually

“at-risk”– To determine amounts actually at-risk, take

the amount of cash or other assets contributed and• Add debts for which taxpayer is responsible• Adjust for share of income (loss) from the

activity• Reduce by amount of withdrawals

Tax Shelter Losses Passive Activity Loss

• A passive activity is any trade or business in which the taxpayer does not materially participate

• Passive Activity Loss Rules disallow the deduction of passive activity losses from other forms of income

Types of Income and Losses• Active: salary and wages of an employee

and income earned from a business in which the owner/recipient materially participates

• Portfolio: interest and dividends• Passive: tax shelter income, income passed

through to limited partners, and income from other businesses in which owner/recipient does not materially participate

Passive Activity Loss• Taxpayers subject to the limitations:

– All non-corporate taxable entities– Conduit entity passive losses flow-through to

owners

• Taxpayers not subject to the limitations:– Publicly held corporations

• PAL can offset active and portfolio income

– Closely held corporations• PAL can offset active income, but not portfolio

Passive Activity LossGeneral Rules for Limitations

• Passive activity losses must be netted against passive activity income–Net passive losses are not

deductible–Net passive gains are reported

with other income

Passive Activity LossException for Rental Real Estate

• By definition, all rental activities and limited partnership interests are passive

• But, taxpayers who materially participate in rental real estate business are allowed to offset any losses against other active or portfolio income

Passive Activity LossDisposition of Passive Activities

• Excess (suspended) losses must be accounted for in the year of disposition

• Disposition by sale frees the suspended loss to offset income of any other activity– First, offsets other passive income– Second, offsets gain from disposal– Third, any remaining PAL offsets ordinary

income

Disposition of Passive Activities• Disposition upon death leaves the passive

activity in the decedent’s estate– Passive activity with unrealized gain

• Beneficiary takes passive activity with stepped-up basis

• Released excess loss is deductible against other income, but

• Any unrealized gain on activity decreases amount of suspended loss to release

– Passive activity with unrealized loss• No suspended loss is released

General Loss Limitation• If a partner’s share of losses

exceeds the partner’s basis– Partner can only deduct losses to

the extent of basis– Excess losses are carried forward

(indefinitely) to future years until there is sufficient basis against which to deduct the unused losses

Material Participation• Current activity level

–500 hours or more participation in year–Participation is substantially all the

activity by all persons–At least 100 hours and no one else

participates more–At least 100 hours in more than one

activity and aggregate of activities exceeds 500 hours

Material Participation

• Prior activity level–Materially participated in 5 of

preceding 10 years–Materially participated in 3 prior

years in personal service activity

Rental Real Estate Relief• Taxpayers can qualify for up to $25,000

deduction for rental real estate losses• Taxpayer must own at least 10% and

actively participate in management–Set rents, qualify renters, approve repairs

• Deduction phases out for AGIs between $100,000 and $150,000

Bud is single & received wages of $140,000 from IBM in 2013. Bud is a 50% partner in a partnership engaged in a rental real estate activity w/ $60,000 loss for the partnership. Bud was an active participant in the rental real estate activity. He had no other income.

How much of the partnership rental loss may Bud deduct on his 2013 income tax

return? (Sec. 469(i))a. $0 b. $5,000 c. $15,000 d. $25,000

Bud - Loss from rental activity.

Maximum loss write-off

Threshhold

Phase-out percentage

AGI- above threshhold

Reduction in max loss

Maximum write-off

Bud - Loss from rental activity.

Maximum loss write-off $25,000

Threshhold 100,000

Phase-out percentage 50%

AGI- above threshhold 40,000

Reduction in max loss 20,000

Maximum write-off $5,000

Real PropertyBusiness Exception

• Taxpayers must spend more than half their time in real property businesses in which they materially participate and time spent equals or exceeds 750 hours

A taxpayer has this income (losses) for the current year:Active Income $43,000 Portfolio Income $29,000Passive Income $(27,000)What is the taxpayers taxable income (loss) if:

T/P is single individual & passive income is not from rental?An individual cannot deduct passive losses against active or portfolio income. The individual taxpayer has taxable income of $72,000 ($43,000 + $29,000) and a suspended loss of $27,000.

T/P is a single individual and the passive income results from a rental activity for which the taxpayer fails to qualify as a real estate professional?Individual - active participant in a rental real estate activity - is allowed to deduct up to $25,000 of losses from rental activities against active and portfolio income. The taxable income is $47,000 ($43,000 + $29,000 - $25,000).

T/P is single and the passive income results from a rental activity for which the taxpayer qualifies as a real estate professional? An individual who qualifies as real estate professional can deduct all losses from the activity against active and portfolio income. The taxable income is $45,000 ($43,000 + $29,000 - $27,000).

Laura owns a commercial office building. She spends more than 500 hours a year managing the building. She also spends 1,700 hours working in her own real estate development firm.

Laura qualifies as a real estate professional. She spends more than 50% of her personal service time in a real property trade or business, the amount of time spent in the real property trade or business is greater than 750 hours, and she materially participates in the rental activity (i.e., spends greater than 500 hours managing the rental activity). Because she qualifies as a real estate professional, office building is not passive activity.

Assume the same facts as in preceding slide, except that Laura hires a full-time manager for the commercial office building. She spends 75 hours meeting with the manager and reviewing the operations. 

The office building is a passive activity. Because Laura does not spend more than 500 hours managing the rental property, she does not qualify as a real estate professional.

Bus. Losses

Invest. losses

Casualty,Theft

Transaction Losses Transaction losses result from the disposition of business, investment or personal-use assets.

Transaction Losses:Trade or Business Losses

• Business casualty and theft losses result from damage caused by a sudden, unexpected and/or unusual event–For property fully destroyed, deduct the

adjusted basis less insurance recovery–For property partially destroyed, deduct

lesser of the property’s adjusted basis, or the decline in the property’s value

Involuntary Conversions • An involuntary conversion results from

– Theft – embezzlement, larceny and robbery (but not simply losing items)

– Casualty – requires a sudden, unexpected, and unusual event such as a fire, flood, tornado, hurricane or vandalism

– Condemnation – lawful taking of property for its fair market value by a government under the right of eminent domain

Casualties and Thefts

• Gains and losses sustained on casualties and thefts are not under a taxpayer’s control so they receive special tax treatment–Allowable losses (including personal

losses) are immediately deductible–Gains (due to receipt of insurance

proceeds) may be deferred if all insurance proceeds are used to repair the damaged property or to acquire qualifying replacement property

Casualty and Theft Losses• Partial destruction of Business or Investment

Property– Loss limited to the lesser of:

1. Decline in fair market value (or repair costs to restore property to pre-casualty condition)

2. The adjusted basis of the property

Complete Destruction of Business Property3. For business property that is completely

destroyed, the loss is always the property’s adjusted basis.

• The loss computed above is then reduced by any insurance proceeds received

Business asset-Partial Destruction

FMV before fire $300,000FMV after fire 200,000

Decline in value 100,000Cost basis 150,000

< of decline or basisIns. proceedsDeductible loss

Loss: cost to repair or value decline?

What if ending FMV was $40,000?

Business asset-Partial Destruction

FMV before fire $300,000FMV after fire 200,000

Decline in value 100,000Cost basis 150,000

< of decline or basis 100,000Ins. proceeds 0Deductible loss $100,000

Loss: cost to repair or value decline?

What if ending FMV was $40,000?

Casualty &Theft Loss Deductions• Thefts are deductible in year of discovery• For casualties in designated disaster areas,

taxpayer can elect to deduct loss in preceding year

• A net business loss is deducted from ordinary income; an investment loss is an itemized deduction

• Individuals have additional limits on losses from personal-use property:– $100 floor per casualty (per event) – 10% of AGI threshold– Must itemize to deduct loss

Jim's business building was totally destroyed by fire. The property had an adjusted basis of $150,000 and a FMV of $130,000 before the fire. Jim received insurance reimbursement of $120,000 for the destruction of the workshop. Jim's AGI was $70,000, before considering this loss. Jim had no casualty gains during the year. What is Jim’s fire loss deduction on his tax return?a. $ 2,900 b. $ 8,500 c. $ 30,000

Business asset Jim

Adjusted gross income $70,000FMV before the casualty 130,000FMV after the casualty 0Decline in valueCost basisInsurance proceedsLoss

Business asset Jim

Adjusted gross income $70,000FMV before the casualty 130,000FMV after the casualty 0Decline in value 130,000Cost basis 150,000Insurance proceeds 120,000Loss $30,000

If not insured, deduct basis-$150,000

Gains on Involuntary Conversions

• If the insurance recovery on a casualty or theft is greater than the loss, the taxpayer has a gain

• Condemnations usually result in gain because proceeds received are usually fair market value

Gains on Involuntary Conversions• If all proceeds are used to acquire qualified

replacement property (or repair the property to its pre-casualty condition) within the required replacement period, the gain is deferred

• Gain may have to be recognized if all proceeds are not used to acquire replacement property (or make repairs to the damaged property) within the required time period

Investment lossesCapital lossesSmall bus. stockRelated PartyWash sales

Transaction Losses:Investment-Related Losses

• Net capital losses result from netting short-term and long-term capital gains and losses–Individual taxpayers may deduct only

$3,000 annually–Corporate taxpayers may not deduct any

net capital loss• Carry-back for 3 years, then forward for 5

Transaction Losses:Investment-Related Losses

• Losses on Small Business Stock may be deducted up to $50,000 per person ($100,000 per married couple) per year– Small business = a corporation with

capitalization of less than $1 million– Stock must have been bought directly from

corporation– Excess over $50,000 ($100,000) is netted with

other capital gains and losses

Transaction Losses:Investment-Related Losses

• Losses on Related Party Sales are disallowed because they generally fail the arm’s length transaction concept–Loss is carried forward with the property

• Gain from later sale may be offset by deferred loss

• Loss cannot be created or increased by using the deferred loss

Transaction Losses:Investment-Related Losses

• Wash Sale losses are disallowed because the sale violates the substance-over-form doctrine– A wash sale occurs when a security is sold at

a loss, and during +/- 30 days of the sale the seller buys substantially identical securities

– Disallowed loss amount is added to the basis of the replacement security

Section 1244 Stock

• Losses on stock are usually capital losses; individuals are limited to a $3,000 deduction against ordinary income annually after netting losses against capital gains

• Section 1244 permits an ordinary loss deduction of up to $50,000 ($100,000 if a joint return) annually for losses on qualified stock if an individual is the original investor in a domestic small business corporation

• Any excess loss is a capital loss

Section 1244 Stock• Total capitalization cannot exceed $1

million• For the 5 preceding years

– The corporation must be an operating company deriving 50% or more of its annual gross revenues from the sale of goods or services

– Income from rents, royalties, dividends, interest, annuities and gain on sales of securities is limited to 50% or less

Section 1244 Stock-2Vanessa bought 2,000 shares of Barbco stock when the company was formed for $107,000. The company had $900,000 of total capital upon formation; thus, it qualified as Section 1244 stock. Vanessa sold the stock three years later for $3,000. If Vanessa is single, how much and what kind of gain or loss does she have?

Section 1244 Stock-3

Vanessa has a total loss on the Section 1244 stock of $104,000 ($3,000 – $107,000). She can treat $50,000 of the loss as an ordinary loss, deductible from ordinary income. The remaining $54,000 loss is a long-term capital loss.

Section 1244 StockShe can deduct $3,000 this year as a capital loss giving her a total deduction of $53,000 in the current year. The remaining $51,000 of the long-term capital loss can only be carried forward and deducted at a rate of $3,000 per year after offsetting other net capital gains in future years.

In April 2013, Pam sold stock with a cost basis of $15,000, to Lisa, her sister, for $12,000.

In September 2013, Lisa sold the same shares of stock to her neighbor, Niki, for $20,000.

What is Pam's loss for 2010?a. $6,000 b. $5,000 c. $1,000 d. $10,000

Pam's Selling price

(received from Lisa) $12,000

Pam's Basis 15,000

Pam's Gain (loss) realized (3,000)

Pam's Gain (loss) recognized

Loss on related party sale -

not deductible.

Sale to Relative

Pam's Selling price

(received from Lisa) $12,000

Pam's Basis 15,000

Pam's Gain (loss) realized (3,000)

Pam's Gain (loss) recognized $0

Loss on related party sale -

not deductible.

Sale to Relative

In April 2013, Pam sold stock with a cost basis of $15,000, to Lisa, her sister, for $12,000.

In September 2013, Lisa sold the same shares of stock to her neighbor, Niki, for $20,000. What isLisa's gain for 2010?a. $6,000 b. $5,000c. $1,000 d. $10,000

Selling Price received by Lisa $20,000

Basis to Lisa 12,000

Gain realized by Lisa 8,000

Less Loss Disallowed earlier

on sale by Pam (3,000)

Gain recognized by Lisa $5,000

Sale at gain after disallowed loss on sale by relative

Wash Sales• Wash sale - identical securities acquired

within 30 days before or after the sale date (a 61-day period)– Wash sale losses are disallowed but gains are

taxed– Loss is deferred by adding disallowed loss to

basis of new shares– If more stock is sold than is purchased within

the 61-day period, only a portion of the loss representing the repurchased stock is deferred

Ms. Rich had these transactions in GM Corp. stock.

No. of Total

Date Event Shares Amount

01/02/01 Bought: 4,000 Cost $20,000

12/31/13 Sold: 4,000 Sell. Price $12,000

01/02/13 Bought: 2,000 Cost $6,000

How much loss may she deduct for 2013?

What is the basis of the stock bought in 2013?

Wash SaleMoore bought 2,000 shares of VBT stock over the Internet on January 2 of year 4 for $50,000. On December 28 of year 3, his broker sold 3,000 shares of VBT for $85,000 that she had been holding in Moore’s account. This stock had been purchased in year 1 for $100,000. What is Moore’s realized and recognized gain or loss? What is his basis in the stock purchased on January 2?

Wash Sale

The sale of the stock by the broker yields a $15,000 ($85,000 - $100,000) realized loss, but only $5,000 is recognized. Moore cannot recognize two-thirds of the loss due to his purchase of 2,000 shares in January after the loss on the sale of 3,000 shares in December due to the wash sale rules. The disallowed loss of $10,000 (2/3 x $15,000 total loss) is added to the basis of the 2,000 shares purchased in January for a total basis for those shares of $60,000 ($50,000 + $10,000).

Losses-

Personal use items

Transaction Losses: Personal Use Losses• Losses from the disposition of

personal use assets are generally not deductible

• Exception exists for personal casualty and theft losses

Casualty and Theft Losses• Partial or complete destruction of

Personal use Property– Loss limited to the lesser of:

1. Decline in fair market value (or repair costs to restore property to pre-casualty condition)

2. The adjusted basis of the property

• The loss computed above is then reduced by any insurance proceeds received

Transaction Losses:Personal Casualty and Theft Losses

Loss is the lesser of The property’s adjusted basis, or

The decline in FMV of the property (repair cost)

Loss cannot be more than FMV before event

Loss is reduced byInsurance proceeds received,

$100 per event (Administrative convenience), and

10% of AGI per year

John bought a family auto for $20,000. After 10 years of family use, the auto is worth $6,000. It is totally destroyed by a storm and it is not insured. John’s AGI is $50,000. What is the loss deduction?

Taxpayer: John

Adjusted gross income $50,000FMV before the casualty 6,000FMV after the casualty 0Decline in value 6,000Cost basis 20,000Lesser of cost or decline 6,000Insurance proceeds 0

6,00010% of AGI (5,000)$100 floor (100)Deduction $900

Jane's residence was totally destroyed by fire. The property had an adjusted basis of $150,000 and a FMV of $130,000 before the fire. Jane received insurance reimbursement of $120,000 for the destruction of her home. Jane's adjusted gross income was $70,000. Jane had no casualty gains during the year. What amount of the fire loss was Jane entitled to claim as an itemized deduction on her tax return?a. $ 2,900 b. $ 8,500 c. $ 8,600 d. $10,000

Personal asset - totally destroyed.

Adjusted gross income $70,000

FMV before the casualty 130,000

FMV after the casualty 0

Decline in value 130,000

Cost basis 150,000

Lesser of cost or decline 130,000

Insurance proceeds received 120,000

Loss after Ins. Proceeds

10% of AGI

$100 floor

Deduction

Personal asset - totally destroyed

Adjusted gross income $70,000

FMV before the casualty 130,000

FMV after the casualty 0

Decline in value 130,000

Cost basis 150,000

Lesser of cost or decline 130,000

Insurance proceeds received 120,000

Loss after Ins. Proceeds 10,000

10% of AGI (7,000)

$100 floor (100)

Deduction $2,900

Asset Type Business Personal1 Adjusted gross income N/A 70,0002 FMV before casualty 170,000 170,0003 FMV after casualty 30,000 30,0004 Decline in value (or repair cost?) 140,000 140,0005 Cost basis 150,000 150,0006 Lesser of line 4 or 5 140,000 140,0007 Loss before insurance 140,000 140,0008 Insurance proceeds received 80,000 80,0009 Loss or (gain if insurance greater) 60,000 60,000

10 10% of AGI (7,000)11 $100 floor (100)12 Deduction $52,900

Case 1 may involve repair costs of $140,000.

Casualty

3 4Asset type Business Personal

1 Adjusted gross income N/A 70,0002 FMV before casualty 90,000 90,0003 FMV after casualty 0 04 Decline in value (repair?) 90,000 90,0005 Cost basis 100,000 100,0006 Lesser of line 4 or 5 90,000 90,0007 Loss before insurance 100,000 90,0008 Insurance proceeds 80,000 80,0009 Loss or (gain) 20,000 10,000

10 10% of AGI (7,000)11 $100 floor (100)12 Deduction $2,900

Case 1 may involve repair costs of $140,000.

Complete Destruction

Casualty

1 2 3 4Asset type Business Personal Business Personal

1 Adjusted gross income N/A 70,000 N/A 70,0002 FMV before casualty 170,000 170,000 90,000 90,0003 FMV after casualty 30,000 30,000 0 04 Decline in value 140,000 140,000 90,000 90,0005 Cost basis 150,000 150,000 100,000 100,0006 Lesser of line 4 or 57 Loss before insurance8 Insurance proceeds 80,000 80,000 80,000 80,0009 Loss or (gain)

10 10% of AGI11 $100 floor12 Deduction

Case 1 may involve repair costs of $140,000.

Partial Dest. Complete Dest.

Casualty

1 2Asset type Business Personal

1 Adjusted gross income N/A 70,0002 FMV before casualty 170,000 170,0003 FMV after casualty 30,000 30,0004 Decline in value (repair?) 140,000 140,0005 Cost basis 150,000 150,0006 Lesser of line 4 or 5 140,000 140,0007 Loss before insurance 140,000 140,0008 Insurance proceeds 80,000 80,0009 Loss or (gain) 60,000 60,000

10 10% of AGI (7,000)11 $100 floor (100)12 Deduction $52,900

Case 1 may involve repair costs of $140,000.

Partial Destruction

Casualty

1 2 3 4Asset type Business Personal Business Personal

1 Adjusted gross income N/A 70,000 N/A 70,0002 FMV before casualty 170,000 170,000 90,000 90,0003 FMV after casualty 30,000 30,000 0 04 Decline in value 140,000 140,000 90,000 90,0005 Cost basis 150,000 150,000 100,000 100,0006 Lesser of line 4 or 5 140,000 140,000 90,000 90,0007 Loss before insurance 140,000 140,000 100,000 90,0008 Insurance proceeds 80,000 80,000 80,000 80,0009 Loss or (gain) 60,000 60,000 20,000 10,000

10 10% of AGI (7,000) (7,000)11 $100 floor (100) (100)12 Deduction $52,900 $2,900

Case 1 may involve repair costs of $140,000.

Partial Destruction Complete Destruction

The End