section 165 casualty losses

§ 165 Losses
 

(a)               In general, deduction of any loss sustained during the taxable year shall be allowed if such loss is not compensated by insurance.

(b)               The basis for determining the amount of deduction for any loss shall be the adjusted basis provided in § 1011[1] for determining the loss from sale or other disposition of property. 
 
(c) Deduction shall be limited to losses incurred in a trade or business, losses incurred in any transaction entered into for profit, and except as provided in (h), losses arise from fire, storm, shipwreck, or other casualty, or from theft.
 
(h)  Any loss of an individual arising from fire, storm, shipwreck, or other casualty, or from theft shall be allowed only to the extent it exceeds $100 from each casualty or theft.

Net casualty loss shall be allowed only to the extent it exceeds 10% of adjusted gross income.  If personal casualty losses exceed personal casualty gains[2] for the taxable year, the deduction for personal casualty losses is limited to the amount of losses that exceed the sum of personal casualty gains and 10% of the adjusted gross income for the taxable year.  If personal casualty gains exceed personal casualty losses, such gains and losses shall be treated as gains and losses from sales or exchanges of capital assets.
 
Special rules:

If personal casualty loss exceeds gain, the deduction for personal casualty losses for any taxable year shall be treated as a deduction allowable in computing adjusted gross income to the extent such losses do not exceed the personal casualty gains fro the taxable year.

A husband and wife making a joint return shall be treated as one individual.

The adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that the deductions for costs paid or incurred in connection with the administration of the estate of trust shall be treated as allowable in arriving at adjusted gross income.

No loss described in subsection (c) shall be allowed if such loss has been claimed for estate tax purposes in the estate tax return at the time of filing the return.

Any loss of an individual described in subsection (c) to the extent covered by insurance shall be taken into account under this section only if the individual files a timely insurance claim with respect to such loss.

Reg. § 1.165-7 Casualty Loss
Do not reflect changes made by P.L. 97-248
 
(a)(1) Allowance of deduction
Any loss arising from fire, storm, shipwreck, or other casualty is allowable as a deduction under § 165(a) for the taxable year in which the loss is sustained, except as otherwise as provided in subsection (b).  The manner of determining the amount of a causally loss allowable as a deduction is the same whether the loss has been incurred in a trade or business or in transaction entered into for profit. 

(2)                                        Method of valuation
A competent appraisal shall ascertain fair market value of the property immediately before and after the casualty to determine the amount of loss deductible under this section.

The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that the repairs are necessary to restore the condition immediately before casualty, the amount for repairs is not excessive, and the value of the property after repairs does not exceed the value of the property before casualty.

(3)              Automobile damages may be subjected to casualty loss, whether used for business purposes or not.  A casualty loss occurs when an automobile is damage and when the damage results from the faulty driving of the taxpayer or other person operating the automobile but not due to the wilful act negligence of the taxpayer or of one acting in his behalf, or from the faulty driving of the operator of the vehicle with which the automobiles of the taxpayer collides.

(4)              This section does not apply to a casualty loss reflected in the inventories.[3]

(5)   Property converted from personal use shall use the fair market value of the property on the date of conversion as the basis for determining the amount of loss if it is less than the adjusted basis.

(6)   Theft loss is not considered as a casualty loss for the purpose of this section.
 
(b)(1) Amount deductible
              The amount of casualty loss to be taken into account for purpose of § 165(a) shall be the lesser of either (i) the fair market value immediately before the casualty reduced by the fair market value immediately after the casualty or (ii) the amount of adjusted basis prescribed in § 1.1011-1for determining loss from sale or other disposition of the property, however, if property used in a trade or business or for production of income is completely destroyed by casualty and if the fair market value immediately before casualty is less than the adjusted basis of such property, the amount of adjusted basis shall be treated as the amount of loss.[4]

(2)   Aggregation of property for computing loss
A loss incurred in a trade or business or transaction entered into for profit shall be determined under subsection (1) by reference to the single, identifiable property damaged or destroyed.  Losses shall be measured into account separately.

A loss involving real property and improvements not used in a trade or business nor transaction entered into for profit, improvements for the damaged property shall be treated as an integral part of the property.

(3)   Limitation on certain losses sustained by individuals after December 31, 1963.
The deduction allowable under § 165(a) in respect of a loss sustained in a taxable year ending after December 31, 1963, in respect of property not used in a trade or business nor for income producing purposes, and from a single casualty shall be limited to the loss in excess of $100. [5] The $100 limitation applies separately in respect of each casualty and applies to the entire loss sustained from each casualty and it applies separately to each individual who sustains a loss even though the property damaged or destroyed is owned by two or more individuals.

If a loss is sustained in respect of property used partially for business and partially for nonbusiness purposes, the $100 limitation applies only to that portion of loss attributable to the nonbusiness use.

(c)              Loss sustained by an estate
              A casualty loss of property not used in a trade or business not for income producing purposes is sustained during the settlement of an estate shall be allowed as a deduction under § 165(a) and 641(b) in computing the taxable income of the estate if the loss has not been allowed under § 2054 in computing taxable estate of decedent and if the statement has been filed in accordance with § 1.642(g)-1.[6]

(d)              Loss treated as though attributable to a trade or business
              Casualty loss not related to a trade or business is treated as a deduction attributable to a trade or business for purposes of computing a net operation loss. [7]
             
(e)              Effective date
              The rules of this section are applicable to any taxable year beginning after January 16, 1960.  If desires, taxpayer may amend income tax return for such year to compute the amount of a casualty loss in accordance with the provisions of this section.

 
                         (5)

[1] Under § 1011, the adjusted basis for determining the gain or loss from the sale or other disposition of property shall be the basis determined under § 1012 or other applicable sections of this subchapter, and adjusted as provided in § 1016.
 
[2] The term "personal casualty gain" means the recognized gain from any involuntary conversion of property which is described in subsection (c) arising from fire, storm, shipwreck, or other casualty, or from theft.
[3] See § 471 for provisions relating to inventories.
[4] For the purpose of § 165(a)
[5] The nondeductibility of the first $100 of loss applies to a loss sustained after December 31, 1963, without regard to when the casualty occurred.
[6] See § 165(c)(3)
[7] See (a)(3)

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