Jerome owns a farm, which has three separate houses. He rents out two of the houses and lives in the other house. During 2018, a tornado, a federally-declared disaster, 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 2018, a tornado, a federally-declared disaster, 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. This statement is incorrect because Rental House A was not damaged by the tornado, so Jerome cannot deduct the loss.

II. This statement is correct because the decline in value is greater than the insurance reimbursement, so Jerome can deduct the loss of $35,000 ($60,000 value before the tornado - $20,000 value after the tornado - $20,000 insurance reimbursement).

III. This statement is correct because the decline in value is greater than the insurance reimbursement, so Jerome can deduct the loss of $9,900 ($80,000 adjusted basis - $70,000 value after the tornado - $60,000 insurance reimbursement).

IV. This statement is incorrect because Rental House A was not damaged by the tornado, so Jerome cannot deduct the loss.

Jerome Owns a Farm, Which Has Three Separate Houses