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Calculating casualty loss deduction.

A Casualty Loss Deduction is measured by the lesser of (a) reduction and fair market value of the property as a result of the event or (b) the purchase price of the property (plus any improvements and renovations to it subsequent to purchase).

The key is to establish the decrease in the value of the property, and, for that, an appraisal is needed.

In certain cases, other means may also be employed to establish a change in property value.

Use of an Appraisal

The appraisal needed to establish the change in property value subsequent to the casualty or theft loss must be done by a qualified and competent appraiser familiar with market conditions relevant to the subject property.

This is important in order to establish reduction in value of the property solely because of the event, rather than marketplace conditions.

Under IRS guidelines, several important factors must be taken into account for the appraisal to be acceptable. These include the appraiser's qualifications to do the appropriate research with respect to the property, and his or her knowledge of standard appraisal methodology.

These methods include investigating comparable sales and evaluating conditions in the particular area where the casualty event occurred. In certain situations where the properly was appraised for purposes of obtaining a federal loan (or a federal loan guarantee) it may be possible to rely on the appraisal to document the change in property value.

Cost of Cleaning or Making Repairs

Many people, that have sustained losses to personal property as a result of Hurricane Sandy, will not have appraisals of the property to attest to its value before the storm hit.

It thus becomes difficult to prove diminution of property value. The IRS will allow a reasonable method to figure a loss in value by making reference to the cost of cleaning or repairing the damaged property.

The cost of repairing damage is not, in and of itself, the measure of the casualty loss.

However what is permissible is the use of the cost of cleaning or repairing storm damage to measure the decrease in the value of the property provided certain conditions are met.

Among them are the requirements that the repairs have actually been made, such repairs were necessary to bring the property back to its condition immediately before the casualty, the amount spent for the repairs were not "excessive" and the repairs only fixed the damage to the property, but did not improve it beyond its original condition.


The cost of restoring landscaping to a home or other real estate to its original condition may also indicate a decrease in property value.

It may be possible to measure the loss in value by what is being spent on landscaping, which includes removing destroyed or damaged trees or shrubs, pruning and other measures undertaken to preserve damaged trees and shrubs and replanting, where necessary, to restore the property to its original condition.

Car Value

Various available lists of automobile values may be a useful indicator of decrease in value of a damaged or destroyed car. It is permissible to use the retail value listed for the automobile in question and modify such value by factors such as mileage on the car before its damage or destruction.

These list prices are not official, but they are a useful indication of value and suggestive of comparables for a particular automobile.

If the car in question is not listed in any of the published lists, other sources for determining value should be used. A dealer's offer for the car as a trade-in for a new one is not necessarily a measure of true value.

Items Not to Consider in Determining Decrease in Value

In accordance with IRS guidelines, there are a number of items that, in general, may not be used to establish a decrease in value of the casualty loss property.

These items include the cost to protect the property against the casualty or theft, replacement costs to obtain new property, sentimental value and the cost of photographs or appraisal of damaged property.

Incidental expenses such as from personal injury or the cost of temporary housing and car rental are also not to be considered.

Stephen Schlachter, CPA, Margolin, Winer & Evens LLP
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Title Annotation:BANKING & FINANCE
Author:Schlachter, Stephen
Publication:Real Estate Weekly
Date:May 1, 2013
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