A flood 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 resulting from the flood.

Question

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The casualty loss is calculated as the difference between the FMV of the property before the casualty and its FMV after the casualty, minus any insurance reimbursement received. In this case, the FMV before the flood was $42,500 and the rug was destroyed, so the FMV after the flood is $0. The McConnells did not receive any insurance reimbursement, so their casualty loss is $42,500 - $0 = $42,500. However, since they originally purchased the rug for $13,000, their adjusted basis in the rug is $13,000. Therefore, their casualty loss is limited to their adjusted basis, which is $13,000. The excess FMV is not relevant for the calculation of the casualty loss. Thus, the correct answer is D) $12,900.

A Flood Destroyed an Antique Persian Rug Owned by Mr