Casualty and Theft Losses and Involuntary Conversions

If your property is damaged or stolen and insurance or other recoveries do not make you whole, the tax law lets you deduct your losses. The tax treatment of unreimbursed losses depends on the purpose for which you held the damaged, destroyed, or stolen property. A loss of property held for:

• Personal purposes, such as your home or car, is reduced by $100 per occurrence in the year, as well as 10% of your adjusted gross income. Occasionally, there are exceptions (e.g., losses caused by Hurricane Katrina, Rita, or Wilma were exempt from the $100/10% limits). The loss must claimed as an itemized deduction.
• Income-producing purposes, such as negotiable securities, is reported as an itemized deduction, but is not subject to the $100/10% limits for personal losses. Instead, casualty or theft losses on income-producing property is a miscellaneous itemized deduction; only amounts in excess of 2% of adjusted gross income are deductible.
• Business or rental purposes is not an itemized deduction. No limits apply.

The fact that property is damaged, destroyed, or stolen does not automatically mean there is any tax loss. Insurance or other reimbursements may produce a tax gain. This gain can be deferred by replacing or repairing the property.

Incidental costs to a casualty or theft, such as appraisal fees or photos to establish the extent of the loss, are claimed as miscellaneous itemized deductions, separate and apart from the loss. Miscellaneous itemized deductions can be claimed only to the extent they exceed 2% of adjusted gross income.