Terry has a casualty gain of $1,000 and a casualty loss of $5,500, before the $1

Question

Terry has a casualty gain of $1,000 and a casualty loss of $5,500, before the $100 floor and before the adjusted gross income limitation. The gain and loss were the result of two separate casualties occurring during the current year and both properties were personal-use assets. If Terry itemizes deductions on her current year return and has adjusted gross income of $25,000, what is Terry's gain or net itemized deduction as a result of these casualties?

A. $1,900 itemized deduction

B. $2,800 itemized deduction, $1,000 capital gain

C. $5,300 itemized deduction, $1,000 capital gain

D. $1,800 itemized deduction

E. None of these choices are correct.

Explanation / Answer

Casualty gain is treated as capital gain for personal- use assets and is taxable in the same year. Exception is as follows:

If your main home is destroyed and the insurance proceeds result in a gain:

Casualty Loss:

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. A sudden event is one that is swift, not gradual or progressive. An unexpected event is one that is ordinarily unanticipated and unintended. An unusual event is one that isn't a day­to­day occurrence and that isn't typical of the activity in which you were engaged. Generally, casualty losses are deductible during the taxable year that the loss occurred.

Deduction is allowed as given below:

You can treat this as a sale of residence subject to the same rules.

If the home was not used or owned for 2 of the last five years a reduced maximum gain exclusion will apply.

If located in a Federally Declared Disaster Area, you can postpone any "recognized" gain on your main home if you buy a new home within 4 years of the end of the year the disaster occurred, or

You can recognize the gain and report it.

You do not have to recognize gain on destroyed/damaged business property if it is replaced within two years of the end of the tax year in which the gain is realized.

If received payment in 2004 resulting in a gain, you must replace the property prior to 1/1/2007 to defer the gain.

$100 Rule

10% Rule

General Application

You must reduce each casualty or theft loss by $100 when figuring your deduction. Apply this rule to personal use property after you have figured the amount of your loss.

You must reduce your total casualty or theft loss by 10% of your adjusted gross income. Apply this rule to personal use property after you reduce each loss by $100 (the $100 rule).

Therefore as per given illustration casualty loss allowed for deduction is:

1. Loss - $5,500

2. . Subtract $100 per incident - $100

3. Loss after$100 rule - $5,400

4. Subtract 10% of $25,000 AGI - $2,500

5. Casualty loss deduction - $2,900

So 2,900 itemized deduction, $1000 capital gain.

Correct answere is E (None of these choices are correct.)

$100 Rule

10% Rule

General Application

You must reduce each casualty or theft loss by $100 when figuring your deduction. Apply this rule to personal use property after you have figured the amount of your loss.

You must reduce your total casualty or theft loss by 10% of your adjusted gross income. Apply this rule to personal use property after you reduce each loss by $100 (the $100 rule).

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