Jerome owns a farm,which has three separate houses.He rents out two of the houses and lives in the other house.During the current year,a tornado goes through his property causing damage to the houses.Rental House A had a fair market value of $40,000 and an adjusted basis of $20,000,but it is not damaged by the tornado.A local real estate agent told Jerome that because of the tornado,property values in the area have declined 10%.Rental House B,which has an adjusted basis of $25,000,is worth $60,000 before the tornado and $20,000 after the tornado.Jerome's insurance company pays him $20,000 for the damage to Rental House B.Jerome's residence (which has an adjusted basis of $80,000)was worth $70,000 before it is totally destroyed by the tornado.Jerome's insurance company reimburses him $60,000 for the loss of his residence.Ignore the limitation based on Adjusted Gross Income.
I.Jerome deducts a loss of $5,000 on Rental House A.
II.Jerome deducts a loss of $35,000 on Rental House B.
III.Jerome's loss on his residence is $9,900.
IV.Jerome cannot deduct a loss on Rental House A.

Question

Jerome owns a farm,which has three separate houses.He rents out two of the houses and lives in the other house.During the current year,a tornado goes through his property causing damage to the houses.Rental House A had a fair market value of $40,000 and an adjusted basis of $20,000,but it is not damaged by the tornado.A local real estate agent told Jerome that because of the tornado,property values in the area have declined 10%.Rental House B,which has an adjusted basis of $25,000,is worth $60,000 before the tornado and $20,000 after the tornado.Jerome's insurance company pays him $20,000 for the damage to Rental House B.Jerome's residence (which has an adjusted basis of $80,000)was worth $70,000 before it is totally destroyed by the tornado.Jerome's insurance company reimburses him $60,000 for the loss of his residence.Ignore the limitation based on Adjusted Gross Income.
I.Jerome deducts a loss of $5,000 on Rental House A.
II.Jerome deducts a loss of $35,000 on Rental House B.
III.Jerome's loss on his residence is $9,900.
IV.Jerome cannot deduct a loss on Rental House A.
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Quizplus · Accepted Answer

I. Jerome cannot deduct a loss on Rental House A because it was not damaged by the tornado.

II. Jerome deducts a loss of $35,000 on Rental House B. The decrease in value due to the tornado ($60,000 - $20,000 = $40,000) is greater than the insurance reimbursement ($20,000), so the difference ($40,000) is deductible.

III. Jerome's loss on his residence is $9,900. The decrease in value due to the tornado ($70,000 - $60,000 = $10,000) is less than the insurance reimbursement ($60,000), so there is no deductible loss. However, the loss is calculated as follows: Adjusted basis ($80,000) - insurance reimbursement ($60,000) - decrease in value ($10,000) = loss ($9,900).

IV. This statement is incorrect because Jerome can deduct a loss on Rental House B, as explained in statement II.

Jerome Owns a Farm,which Has Three Separate Houses