Today’s question: REG

Nelson Harris had an adjusted gross income of $60,000. During the year his personal summer home was completely destroyed by a cyclone. Pertinent data with respect to the home follows:

Cost basis = $39,000
Value before casualty = $45,000
Value after casualty = $3,000

Harris was partially insured for his loss and he received a $15,000 insurance settlement. What is Harris' allowable casualty loss deduction?

A)   $17,900

B)   $17,500

C)   $26,500

D)   $27,000

Correct Answer: A

Explanation: The personal casualty loss deduction is determined taking the lessor of decrease in the FMV of the property or its basis; less the insurance reimbursement; subject to a $100 floor; and then subject to 10% of the taxpayer's adjusted gross income. The decrease in fair market value was $42,000 ($45,000 down to $3,000) and the cost basis was $39,000. Therefore, using the cost basis, the computations are:

Cost basis of house: $39,000
Less reimbursement: -15,000
Loss by taxpayer: 24,000
Less: $100 floor: -100
Less: AGI limitation ($60,000 x 10%): -6,000
Allowable casualty loss: $17,900