During the current year, Wood\'s residence had an adjusted basis of $150,000 and

Question

During the current year, Wood's residence had an adjusted basis of $150,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later in the current year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood's current year adjusted gross income was $60,000 and he did not have any casualty gains. What total amount can Wood deduct as a current year itemized deduction for casualty loss, after the application of the threshold limitations?

Explanation / Answer

Casualty losses are generally computed as the decline in fair market value,except that the fair market value is limited to the property's basis, here $150,000.Casualtylosses are reduced by the amount of any insurance recovery, reducing this loss to $20,000.Next, each individual loss is reduced by $100, bringing this loss to $19,900.Finally, theremaining total amount of all casualty losses (here there is only one) are deductible only to theextent that the amount exceeds 10% of AGI, or $6,000 here.($150,000$130,000=$20,000;$20,000$100$6,000=$13,900.

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