This summer, Rick's home (which has a basis of $80,000) is damaged by a tornado which was declared a federal disaster. An appraisal by a realtor placed the FMV of the home at $120,000 before the tornado and at $85,000 after the tornado. Rick estimates that the insurance company will reimburse him for 60% of the loss. Next year, the insurance company pays Rick $20,000. Rick's current year's AGI is $50,000 and his next year's AGI is $55,000. Rick suffers no other casualty losses in either year. After limitations, Rick may deduct a casualty loss this year of

Question

Quizplus · Accepted Answer

The correct answer is A because the casualty loss is limited to the lesser of the adjusted basis of the property ($80,000) or the decrease in FMV ($35,000). The insurance reimbursement of $20,000 reduces the deductible loss to $15,000. However, the casualty loss deduction is limited to $10,000 ($50,000 AGI x 10% floor).

This Summer, Rick's Home (Which Has a Basis of $80,000)