A flood destroyed an antique Persian rug owned by Mr. and Mrs. McConnel. 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 McConnels' casualty loss resulting from the flood.

Question

Quizplus · Accepted Answer

The casualty loss is calculated as the decrease in FMV due to the casualty, which is $42,500 - $0 (since the rug was destroyed) = $42,500. However, the loss is limited to the cost basis (i.e. the purchase price) of the property, which in this case is $13,000. Therefore, the casualty loss is $13,000 - $0 = $12,900.

A Flood Destroyed an Antique Persian Rug Owned by Mr