The Ottomans own a winter cabin in Durango,Colorado.They purchased the cabin in 2004 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?
A)$3,900
B)$4,000
C)$8,000
D)$11,900
E)$12,000

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, minus $100, and then reduced by 10% of AGI. The decrease in value is $0 (since FMV after is higher than purchase price), so use repair cost: $40,000 - $28,000 (insurance) = $12,000. Then, $12,000 - $100 - $8,000 (10% of AGI) = $3,900.

The Ottomans Own a Winter Cabin in Durango,Colorado