In a deductible casualty or theft, the basis of property involved is reduced by the amount of insurance proceeds received and by any resulting recognized loss.

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This is because when insurance proceeds are received for a casualty or theft, they are meant to reimburse the taxpayer for a portion of their loss. Therefore, the taxpayer's basis in the property is reduced by the amount of insurance proceeds received. Any resulting recognized loss is also subtracted from the basis.

In a Deductible Casualty or Theft, the Basis of Property