There are rules that are unique to calculating the deduction for personal casualty losses. Basically, the actual loss is calculated as the lesser of:
- The difference in fair market value (FMV) of the property immediately before and immediately after the casualty, or
- The adjusted basis for determining loss from the sale or other disposition of the property.
Property’s drop in FMV can be measured by appraisal or by repair costs. Most taxpayers will use repair costs as a means of practical expedience. We decided to summarize each method below.
Establishing drop in property’s FMV by appraisal. The difference between the FMV of property immediately before and after the casualty should be determined by competent appraiser. The appraiser’s knowledge of comparable property sales and conditions in the area, his familiarity with the damaged property, and his method of determining the loss are important in proving the deductible amount. An appraisal must recognize the effects of any general market decline, so that the casualty loss deduction will be limited to the actual loss resulting from damage to the property.
Repair costs as measure of casualty loss. The costs of repairing, replacing, or cleaning up after the casualty aren’t, in themselves, deductible as casualty losses. However, the cost of repairs is acceptable evidence of the loss of value if the taxpayer shows that:
- The repairs are necessary to restore the property to its condition immediately before the casualty,
- The amount spent for repairs isn’t excessive,
- The repairs don’t repair more than the damage suffered, and
- The value of the property after the repairs doesn’t, as a result of the repairs, exceed the value of the property immediately before the casualty.