The Ottomans own a winter cabin in Durango, Colorado. They purchased the cabin in 1984 for $65,000. During the current year, a blizzard partially destroys the cabin. The fair market value of the cabin after the blizzard is $70,000. The insurance company estimates that the cost of repairing the cabin will be $40,000. The insurance company will reimburse the Ottomans for 70% of the repair cost. What can they deduct as a casualty loss if their adjusted gross income for the year is $80,000?

Question

Quizplus · Accepted Answer

The casualty loss deduction is calculated as the lesser of the decrease in fair market value or the adjusted basis, minus insurance reimbursement. The decrease in value is $35,000 ($105,000 pre-blizzard value - $70,000 post-blizzard value). The insurance covers 70% of $40,000, which is $28,000. The deductible loss is $35,000 - $28,000 = $7,000. After applying the $100 rule and 10% of AGI ($8,000), the deductible loss is $7,000 - $100 - $8,000 = $3,900.

The Ottomans Own a Winter Cabin in Durango, Colorado