The Ottomans own a winter cabin in Durango, Colorado. They purchased the cabin in 2004 for $65,000. During 2018, a blizzard, a federally-declared disaster, 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 Ottomans can deduct $3,900 as a casualty loss. The calculation is based on the insurance reimbursement and the cost of repairs. The insurance covers 70% of the $40,000 repair cost, which equals $28,000. The Ottomans are responsible for the remaining 30%, which is $12,000. Since the loss must be reduced by $100 and then further reduced by 10% of their adjusted gross income ($80,000), the deductible amount is $12,000 - $100 - $8,000 (10% of $80,000) = $3,900.

The Ottomans Own a Winter Cabin in Durango, Colorado