Proving the Loss

April 13, 2006

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In order to claim a deduction for your casualty loss, you must be prepared to prove it. Specifically, if your tax return is audited, you should be prepared to show all of the following:

that you owned the property
the amount of your basis in the property
the pre-disaster value of the asset
the reduction in value caused by the disaster
the lack or insufficiency of reimbursement to cover the costs

To claim the deduction, generally, you must be the owner of the property. Therefore you can't claim a loss for the destruction of property owned by, say, your manager or employee. If more than one person owns the property, the loss must be allocated among the owners in proportion to their ownership interests. However, if the risk of loss was shifted to you by a contract, you can claim a deduction even if you didn't own the property.

If the rental agreement for your office space says that you must pay for any damages to the building resulting from a casualty, then you are entitled to claim a loss deduction for the damages.

Proving the basis of business property is generally not a problem, since you should have adequate records of the property's original cost or other basis, plus any additions or subtractions to the basis, for tax and accounting purposes.

For personal property, proving the basis may be more difficult. For larger items such as your home, you should have retained the sales contract or closing documents in your safe-deposit box, but for furniture, cars, clothing, household items etc., it's quite impractical to save every sales slip. Perhaps luckily, since these items typically depreciate in value over time, their loss would generally be measured by the fair market value at the time of the casualty, not their cost basis to you.

Appraisals and other evidence. A professional appraisal is often the best evidence you can obtain of the value of property before and after a casualty. Ideally, the appraiser would be someone who was at least passingly familiar with your property before and after the theft, who has adequate knowledge of sales of comparable property in the area, who is familiar with conditions in the area, and who uses conventionally accepted appraisal methods.

The cost of obtaining an appraisal is not itself part of your casualty loss, but it can be deducted as a miscellaneous itemized deduction on Schedule A of your individual income tax return (Form 1040)

Among the Business Tools are Form 1040 and Schedule A. They are in Adobe Portable Document Format (.pdf), and you will need the free Acrobat Reader to view and print the file.

While professional appraisals are nice to have, they are not always required, especially for inexpensive items. An insurance adjuster's appraisal may do just as well. If you sell the property after the casualty, the sales price will be evidence of its fair market value (FMV).

For cars, you can often rely on "blue books" or similar sources that provide retail values for cars by age, make, model, condition, mileage etc.

For property that has been damaged, you can use the cost of cleaning it up or repairing it to bring it back to its condition before the casualty as a measure of the difference in fair market value before and after the casualty, so long as the repairs do not actually increase the property's value above its pre-casualty value. Finally, if you have photographs (before and/or after), videotapes, an insurance inventory, any receipts or other documentation, they may all be useful in establishing the property's value.

Work Smart

You may find the IRS's free Publication 584, Nonbusiness Disaster, Casualty, and Theft Loss Workbook, helpful if your home and personal belongings have been largely destroyed by a disaster. It goes through the house room by room and prompts your memory with lists of items commonly found in a typical home, which can also be useful in filing your insurance claim. You can get a copy by calling 1-800-TAX-FORM.