A flood (federally declared disaster) destroyed an antique Persian rug owned by Mr. and Mrs. McConnell. The couple purchased the rug for $13,000 fifteen years ago, but its appraised FMV before the flood was $42,500. Unfortunately, their homeowners' insurance policy does not cover flood damage. Compute the McConnells' casualty loss (before the 10% AGI threshold).

Question

Quizplus · Accepted Answer

The casualty loss is calculated as the lesser of the decrease in FMV or the adjusted basis (original cost of $13,000). Since the FMV before the flood was $42,500 and the adjusted basis is $13,000, the loss is limited to the adjusted basis of $13,000. Therefore, the casualty loss is $13,000. However, the McConnells' casualty loss is subject to the 10% AGI threshold, which is not included in this question. Therefore, the correct answer is D.

A Flood (Federally Declared Disaster) Destroyed an Antique Persian Rug