In 2010,Grant's personal residence was damaged by fire.Grant was insured for 90% of his actual loss,and he received the insurance settlement.Grant had adjusted gross income,before considering the casualty item,of $30,000.Pertinent data with respect to the residence follows: What is Grant's allowable casualty loss deduction?

Question

In 2010,Grant's personal residence was damaged by fire.Grant was insured for 90% of his actual loss,and he received the insurance settlement.Grant had adjusted gross income,before considering the casualty item,of $30,000.Pertinent data with respect to the residence follows:  What is Grant's allowable casualty loss deduction?

Quizplus · Accepted Answer

To determine the allowable casualty loss deduction, we must first determine the lesser of the adjusted basis or the decrease in fair market value due to the casualty. The adjusted basis is $70,000 ($100,000 cost - $30,000 of depreciation). The decrease in fair market value is $80,000 ($150,000 before the fire - $70,000 salvage value after the fire). The lesser of these two is $70,000.
Because Grant was insured for 90% of his actual loss, he received $72,000 ($80,000 actual loss x 90% insurance coverage) from the insurance company. Since this amount exceeds his allowable casualty loss deduction of $70,000, he cannot claim a loss deduction on his tax return. Therefore, the answer is C) $6,900.

In 2010,Grant's Personal Residence Was Damaged by Fire