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2011 Irs Form 8863

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2011 Irs Form 8863

2011 irs form 8863 2. 2011 irs form 8863   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. 2011 irs form 8863 You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. 2011 irs form 8863 This chapter discusses accounting methods. 2011 irs form 8863 For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. 2011 irs form 8863 Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. 2011 irs form 8863 Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. 2011 irs form 8863 Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. 2011 irs form 8863 A material item is one that affects the proper time for inclusion of income or allowance of a deduction. 2011 irs form 8863 An item considered material for financial statement purposes is generally also considered material for income tax purposes. 2011 irs form 8863 See Publication 538 for more information. 2011 irs form 8863 You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. 2011 irs form 8863 If you later want to change your accounting method, you generally must get IRS approval. 2011 irs form 8863 How to obtain IRS approval is discussed later under Changes in Methods of Accounting . 2011 irs form 8863 Types of accounting methods. 2011 irs form 8863   Generally, you can use any of the following accounting methods. 2011 irs form 8863 Each method is discussed in detail below. 2011 irs form 8863 Cash method. 2011 irs form 8863 Accrual method. 2011 irs form 8863 Special methods of accounting for certain items of income and expenses. 2011 irs form 8863 Combination (hybrid) method using elements of two or more of the above. 2011 irs form 8863 Business and other items. 2011 irs form 8863   You can account for business and personal items using different accounting methods. 2011 irs form 8863 For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. 2011 irs form 8863 Two or more businesses. 2011 irs form 8863   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. 2011 irs form 8863 Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. 2011 irs form 8863 Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. 2011 irs form 8863 However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. 2011 irs form 8863 See Accrual Method Required , later. 2011 irs form 8863 Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. 2011 irs form 8863 Items of income include money received as well as property or services received. 2011 irs form 8863 If you receive property or services, you must include the fair market value (FMV) of the property or services in income. 2011 irs form 8863 See chapter 3 for information on how to report farm income on your income tax return. 2011 irs form 8863 Constructive receipt. 2011 irs form 8863   Income is constructively received when an amount is credited to your account or made available to you without restriction. 2011 irs form 8863 You do not need to have possession of the income for it to be treated as income for the tax year. 2011 irs form 8863 If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. 2011 irs form 8863 Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. 2011 irs form 8863 Direct payments and counter-cyclical payments. 2011 irs form 8863   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. 2011 irs form 8863 Delaying receipt of income. 2011 irs form 8863   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. 2011 irs form 8863 You must report the income in the year the money or property is received or made available to you without restriction. 2011 irs form 8863 Example. 2011 irs form 8863 Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. 2011 irs form 8863 She was told in December that her payment was available. 2011 irs form 8863 She requested not to be paid until January 2014. 2011 irs form 8863 However, she must still include this payment in her 2013 income because it was made available to her in 2013. 2011 irs form 8863 Debts paid by another person or canceled. 2011 irs form 8863   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. 2011 irs form 8863 If you receive income in this way, you constructively receive the income when the debt is canceled or paid. 2011 irs form 8863 See Cancellation of Debt in chapter 3. 2011 irs form 8863 Deferred payment contract. 2011 irs form 8863   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. 2011 irs form 8863 However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. 2011 irs form 8863 Example. 2011 irs form 8863 You are a farmer who uses the cash method and a calendar tax year. 2011 irs form 8863 You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. 2011 irs form 8863 You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. 2011 irs form 8863 However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. 2011 irs form 8863 Repayment of income. 2011 irs form 8863   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. 2011 irs form 8863 If the repayment is more than $3,000, a special rule applies. 2011 irs form 8863 For details, see Repayments in chapter 11 of Publication 535, Business Expenses. 2011 irs form 8863 Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. 2011 irs form 8863 This includes business expenses for which you contest liability. 2011 irs form 8863 However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. 2011 irs form 8863 See chapter 4 for information on how to deduct farm business expenses on your income tax return. 2011 irs form 8863 Prepayment. 2011 irs form 8863   Generally, you cannot deduct expenses paid in advance. 2011 irs form 8863 This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 2011 irs form 8863 Example. 2011 irs form 8863 On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. 2011 irs form 8863 In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. 2011 irs form 8863 In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. 2011 irs form 8863 An exception applies if the expense qualifies for the 12-month rule. 2011 irs form 8863 See Publication 538 for more information and examples. 2011 irs form 8863 See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. 2011 irs form 8863 Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. 2011 irs form 8863 The purpose of an accrual method of accounting is to correctly match income and expenses. 2011 irs form 8863 Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. 2011 irs form 8863 See Accrual Method Required and Farm Inventory , later. 2011 irs form 8863 Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. 2011 irs form 8863 Under this rule, include an amount in income on the earliest of the following dates. 2011 irs form 8863 When you receive payment. 2011 irs form 8863 When the income amount is due to you. 2011 irs form 8863 When you earn the income. 2011 irs form 8863 When title passes. 2011 irs form 8863 If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. 2011 irs form 8863 Inventory. 2011 irs form 8863   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. 2011 irs form 8863 An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. 2011 irs form 8863 See Publication 538 for more information. 2011 irs form 8863 Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. 2011 irs form 8863 Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. 2011 irs form 8863 The all-events test has been met. 2011 irs form 8863 This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. 2011 irs form 8863 Economic performance has occurred. 2011 irs form 8863 Economic performance. 2011 irs form 8863   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. 2011 irs form 8863 If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. 2011 irs form 8863 If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 2011 irs form 8863 Example. 2011 irs form 8863 Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. 2011 irs form 8863 She entered into a contract with ABC Farm Consulting in 2012. 2011 irs form 8863 The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. 2011 irs form 8863 It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. 2011 irs form 8863 Jane paid ABC Farm Consulting $2,000 in December 2012. 2011 irs form 8863 Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. 2011 irs form 8863 Economic performance for Jane's liability in the contract occurs as the services are provided. 2011 irs form 8863 Jane incurs the $2,000 cost in 2013. 2011 irs form 8863 An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. 2011 irs form 8863 For more information, see Economic Performance in Publication 538. 2011 irs form 8863 Special rule for related persons. 2011 irs form 8863   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. 2011 irs form 8863 Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. 2011 irs form 8863 For more information, see Internal Revenue Code section 267. 2011 irs form 8863 Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. 2011 irs form 8863 A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. 2011 irs form 8863 A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. 2011 irs form 8863 A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. 2011 irs form 8863 A tax shelter. 2011 irs form 8863 Note. 2011 irs form 8863 Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). 2011 irs form 8863 Family corporation. 2011 irs form 8863   A family corporation is generally a corporation that meets one of the following ownership requirements. 2011 irs form 8863 Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. 2011 irs form 8863 Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. 2011 irs form 8863 Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. 2011 irs form 8863 For more information on family corporations, see Internal Revenue Code section 447. 2011 irs form 8863 Tax shelter. 2011 irs form 8863   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. 2011 irs form 8863 Its principal purpose is the avoidance or evasion of federal income tax. 2011 irs form 8863 It is a farming syndicate. 2011 irs form 8863 A farming syndicate is an entity that meets either of the following tests. 2011 irs form 8863 Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. 2011 irs form 8863 More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. 2011 irs form 8863   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. 2011 irs form 8863   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. 2011 irs form 8863 Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. 2011 irs form 8863 This record should show the actual count or measurement of the inventory. 2011 irs form 8863 It should also show all factors that enter into its valuation, including quality and weight, if applicable. 2011 irs form 8863 Hatchery business. 2011 irs form 8863   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. 2011 irs form 8863 Products held for sale. 2011 irs form 8863   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. 2011 irs form 8863 , must be included in inventory. 2011 irs form 8863 Supplies. 2011 irs form 8863   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. 2011 irs form 8863 Deduct the cost of supplies in the year used or consumed in operations. 2011 irs form 8863 Do not include incidental supplies in inventory as these are deductible in the year of purchase. 2011 irs form 8863 Livestock. 2011 irs form 8863   Livestock held primarily for sale must be included in inventory. 2011 irs form 8863 Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. 2011 irs form 8863 See also Unit-livestock-price method , later. 2011 irs form 8863 If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. 2011 irs form 8863 Growing crops. 2011 irs form 8863   Generally, growing crops are not required to be included in inventory. 2011 irs form 8863 However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. 2011 irs form 8863 See Uniform capitalization rules below. 2011 irs form 8863 Also see Uniform Capitalization Rules in  chapter 6. 2011 irs form 8863 Items to include in inventory. 2011 irs form 8863   Your inventory should include all items held for sale, or for use as feed, seed, etc. 2011 irs form 8863 , whether raised or purchased, that are unsold at the end of the year. 2011 irs form 8863 Uniform capitalization rules. 2011 irs form 8863   The following applies if you are required to use an accrual method of accounting. 2011 irs form 8863 The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. 2011 irs form 8863 The costs of animals are subject to the uniform capitalization rules. 2011 irs form 8863 Inventory valuation methods. 2011 irs form 8863   The following methods, described below, are those generally available for valuing inventory. 2011 irs form 8863 The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. 2011 irs form 8863 Cost. 2011 irs form 8863 Lower of cost or market. 2011 irs form 8863 Farm-price method. 2011 irs form 8863 Unit-livestock-price method. 2011 irs form 8863 Cost and lower of cost or market methods. 2011 irs form 8863   See Publication 538 for information on these valuation methods. 2011 irs form 8863 If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. 2011 irs form 8863 However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. 2011 irs form 8863 Farm-price method. 2011 irs form 8863   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. 2011 irs form 8863 Market price is the current price at the nearest market in the quantities you usually sell. 2011 irs form 8863 Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. 2011 irs form 8863 If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. 2011 irs form 8863 Unit-livestock-price method. 2011 irs form 8863   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. 2011 irs form 8863 You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. 2011 irs form 8863 The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. 2011 irs form 8863 Unit prices and classifications are subject to approval by the IRS on examination of your return. 2011 irs form 8863 You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. 2011 irs form 8863 IRS approval is not required for these adjustments. 2011 irs form 8863 Any other changes in unit prices or classifications do require IRS approval. 2011 irs form 8863   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. 2011 irs form 8863 This method accounts only for the increase in cost of raising an animal to maturity. 2011 irs form 8863 It does not provide for any decrease in the animal's market value after it reaches maturity. 2011 irs form 8863 Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. 2011 irs form 8863   Do not include sold or lost animals in the year-end inventory. 2011 irs form 8863 If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. 2011 irs form 8863 The animals on hand at the end of the year are considered those most recently acquired. 2011 irs form 8863   You must include in inventory all livestock purchased primarily for sale. 2011 irs form 8863 You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. 2011 irs form 8863 However, you must be consistent from year to year, regardless of the method you have chosen. 2011 irs form 8863 You cannot change your method without obtaining approval from the IRS. 2011 irs form 8863   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. 2011 irs form 8863 If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. 2011 irs form 8863 However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. 2011 irs form 8863 This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. 2011 irs form 8863 It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. 2011 irs form 8863 Uniform capitalization rules. 2011 irs form 8863   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. 2011 irs form 8863 This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. 2011 irs form 8863 Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. 2011 irs form 8863 Example 1. 2011 irs form 8863 You are a farmer who uses an accrual method of accounting. 2011 irs form 8863 You keep your books on the calendar year basis. 2011 irs form 8863 You sell grain in December 2013 but you are not paid until January 2014. 2011 irs form 8863 Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. 2011 irs form 8863 Example 2. 2011 irs form 8863 Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. 2011 irs form 8863 Under this method, you include the sales proceeds in income for 2014, the year you receive payment. 2011 irs form 8863 Deduct the costs of producing the grain in the year you pay for them. 2011 irs form 8863 Special Methods of Accounting There are special methods of accounting for certain items of income and expense. 2011 irs form 8863 Crop method. 2011 irs form 8863   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. 2011 irs form 8863 You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. 2011 irs form 8863 Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. 2011 irs form 8863    See chapter 4 for details on deducting the costs of operating a farm. 2011 irs form 8863 Also see Regulations section 1. 2011 irs form 8863 162-12. 2011 irs form 8863 Other special methods. 2011 irs form 8863   Other special methods of accounting apply to the following items. 2011 irs form 8863 Amortization, see chapter 7. 2011 irs form 8863 Casualties, see chapter 11. 2011 irs form 8863 Condemnations, see chapter 11. 2011 irs form 8863 Depletion, see chapter 7. 2011 irs form 8863 Depreciation, see chapter 7. 2011 irs form 8863 Farm business expenses, see chapter 4. 2011 irs form 8863 Farm income, see chapter 3. 2011 irs form 8863 Installment sales, see chapter 10. 2011 irs form 8863 Soil and water conservation expenses, see chapter 5. 2011 irs form 8863 Thefts, see chapter 11. 2011 irs form 8863 Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. 2011 irs form 8863 However, the following restrictions apply. 2011 irs form 8863 If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. 2011 irs form 8863 If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. 2011 irs form 8863 Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). 2011 irs form 8863 Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. 2011 irs form 8863 You may also have to pay a fee. 2011 irs form 8863 To obtain approval, you must generally file Form 3115. 2011 irs form 8863 There are instances when you can obtain automatic consent to change certain methods of accounting. 2011 irs form 8863 See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. 2011 irs form 8863 For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. 2011 irs form 8863 Also see Publication 538. 2011 irs form 8863 Prev  Up  Next   Home   More Online Publications
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The 2011 Irs Form 8863

2011 irs form 8863 Publication 547 - Main Content Table of Contents CasualtyFamily pet. 2011 irs form 8863 Progressive deterioration. 2011 irs form 8863 Special Procedure for Damage From Corrosive Drywall Theft Loss on Deposits Proof of Loss Figuring a LossGain from reimbursement. 2011 irs form 8863 Business or income-producing property. 2011 irs form 8863 Loss of inventory. 2011 irs form 8863 Leased property. 2011 irs form 8863 Exception for personal-use real property. 2011 irs form 8863 Decrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Deduction Limits2% Rule $100 Rule 10% Rule Figuring the Deduction Figuring a GainPostponement of Gain When To Report Gains and LossesLoss on deposits. 2011 irs form 8863 Lessee's loss. 2011 irs form 8863 Disaster Area LossesDisaster loss to inventory. 2011 irs form 8863 Main home in disaster area. 2011 irs form 8863 Unsafe home. 2011 irs form 8863 Time limit for making choice. 2011 irs form 8863 Revoking your choice. 2011 irs form 8863 Figuring the loss deduction. 2011 irs form 8863 How to report the loss on Form 1040X. 2011 irs form 8863 Records. 2011 irs form 8863 Need a copy of your tax return for the preceding year? Postponed Tax Deadlines Contacting the Federal Emergency Management Agency (FEMA) How To Report Gains and LossesProperty held 1 year or less. 2011 irs form 8863 Property held more than 1 year. 2011 irs form 8863 Depreciable property. 2011 irs form 8863 Adjustments to Basis If Deductions Are More Than Income How To Get Tax HelpLow Income Taxpayer Clinics Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. 2011 irs form 8863 A sudden event is one that is swift, not gradual or progressive. 2011 irs form 8863 An unexpected event is one that is ordinarily unanticipated and unintended. 2011 irs form 8863 An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. 2011 irs form 8863 Generally, casualty losses are deductible during the taxable year that the loss occurred. 2011 irs form 8863 See Table 3, later. 2011 irs form 8863 Deductible losses. 2011 irs form 8863   Deductible casualty losses can result from a number of different causes, including the following. 2011 irs form 8863 Car accidents (but see Nondeductible losses , next, for exceptions). 2011 irs form 8863 Earthquakes. 2011 irs form 8863 Fires (but see Nondeductible losses , next, for exceptions). 2011 irs form 8863 Floods. 2011 irs form 8863 Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses , later. 2011 irs form 8863 Mine cave-ins. 2011 irs form 8863 Shipwrecks. 2011 irs form 8863 Sonic booms. 2011 irs form 8863 Storms, including hurricanes and tornadoes. 2011 irs form 8863 Terrorist attacks. 2011 irs form 8863 Vandalism. 2011 irs form 8863 Volcanic eruptions. 2011 irs form 8863 Nondeductible losses. 2011 irs form 8863   A casualty loss is not deductible if the damage or destruction is caused by the following. 2011 irs form 8863 Accidentally breaking articles such as glassware or china under normal conditions. 2011 irs form 8863 A family pet (explained below). 2011 irs form 8863 A fire if you willfully set it, or pay someone else to set it. 2011 irs form 8863 A car accident if your willful negligence or willful act caused it. 2011 irs form 8863 The same is true if the willful act or willful negligence of someone acting for you caused the accident. 2011 irs form 8863 Progressive deterioration (explained below). 2011 irs form 8863 However, see Special Procedure for Damage From Corrosive Drywall , later. 2011 irs form 8863 Family pet. 2011 irs form 8863   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. 2011 irs form 8863 Example. 2011 irs form 8863 Your antique oriental rug was damaged by your new puppy before it was housebroken. 2011 irs form 8863 Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. 2011 irs form 8863 Progressive deterioration. 2011 irs form 8863   Loss of property due to progressive deterioration is not deductible as a casualty loss. 2011 irs form 8863 This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. 2011 irs form 8863 The following are examples of damage due to progressive deterioration. 2011 irs form 8863 The steady weakening of a building due to normal wind and weather conditions. 2011 irs form 8863 The deterioration and damage to a water heater that bursts. 2011 irs form 8863 However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. 2011 irs form 8863 Most losses of property caused by droughts. 2011 irs form 8863 To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. 2011 irs form 8863 Termite or moth damage. 2011 irs form 8863 The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. 2011 irs form 8863 However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. 2011 irs form 8863 Special Procedure for Damage From Corrosive Drywall Under a special procedure, you can deduct the amounts you paid to repair damage to your home and household appliances due to corrosive drywall. 2011 irs form 8863 Under this procedure, you treat the amounts paid for repairs as a casualty loss in the year of payment. 2011 irs form 8863 For example, amounts you paid for repairs in 2013 are deductible on your 2013 tax return and amounts you paid for repairs in 2012 are deductible on your 2012 tax return. 2011 irs form 8863 Note. 2011 irs form 8863 If you paid for any repairs before 2013 and you choose to follow this special procedure, you can amend your return for the earlier year by filing Form 1040X, Amended U. 2011 irs form 8863 S. 2011 irs form 8863 Individual Income Tax Return, and attaching a completed Form 4684 for the appropriate year. 2011 irs form 8863 Form 4684 for the appropriate year can be found at IRS. 2011 irs form 8863 gov. 2011 irs form 8863 Generally, Form 1040X must be filed within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. 2011 irs form 8863 Corrosive drywall. 2011 irs form 8863   For purposes of this special procedure, “corrosive drywall” means drywall that is identified as problem drywall under the two-step identification method published by the Consumer Product Safety Commission (CPSC) and the Department of Housing and Urban Development (HUD) in their interim guidance dated January 28, 2010, as revised by the CPSC and HUD. 2011 irs form 8863 The revised identification guidance and remediation guidelines are available at www. 2011 irs form 8863 cpsc. 2011 irs form 8863 gov/Safety-Education/Safety-Education-Centers/Drywall. 2011 irs form 8863 Special instructions for completing Form 4684. 2011 irs form 8863   If you choose to follow this special procedure, complete Form 4684, Section A, according to the instructions below. 2011 irs form 8863 The IRS will not challenge your treatment of damage resulting from corrosive drywall as a casualty loss if you determine and report the loss as explained below. 2011 irs form 8863 Top margin of Form 4684. 2011 irs form 8863   Enter “Revenue Procedure 2010-36”. 2011 irs form 8863 Line 1. 2011 irs form 8863   Enter the information required by the line 1 instructions. 2011 irs form 8863 Line 2. 2011 irs form 8863   Skip this line. 2011 irs form 8863 Line 3. 2011 irs form 8863   Enter the amount of insurance or other reimbursements you received (including through litigation). 2011 irs form 8863 If none, enter -0-. 2011 irs form 8863 Lines 4–7. 2011 irs form 8863   Skip these lines. 2011 irs form 8863 Line 8. 2011 irs form 8863   Enter the amount you paid to repair the damage to your home and household appliances due to corrosive drywall. 2011 irs form 8863 Enter only the amounts you paid to restore your home to the condition existing immediately before the damage. 2011 irs form 8863 Do not enter any amounts you paid for improvements or additions that increased the value of your home above its pre-loss value. 2011 irs form 8863 If you replaced a household appliance instead of repairing it, enter the lesser of: The current cost to replace the original appliance, or The basis of the original appliance (generally its cost). 2011 irs form 8863 Line 9. 2011 irs form 8863   If line 8 is more than line 3, do one of the following. 2011 irs form 8863 If you have a pending claim for reimbursement (or you intend to pursue reimbursement), enter 75% of the difference between lines 3 and 8. 2011 irs form 8863 If item (1) does not apply to you, enter the full amount of the difference between lines 3 and 8. 2011 irs form 8863 If line 8 is less than or equal to line 3, you cannot claim a casualty loss deduction using this special procedure. 2011 irs form 8863    If you have a pending claim for reimbursement (or you intend to pursue reimbursement), you may have income or an additional deduction in a later tax year depending on the actual amount of reimbursement received. 2011 irs form 8863 See Reimbursement Received After Deducting Loss, later. 2011 irs form 8863 Lines 10–18. 2011 irs form 8863   Complete these lines according to the Instructions for Form 4684. 2011 irs form 8863 Choosing not to follow this special procedure. 2011 irs form 8863   If you choose not to follow this special procedure, you are subject to all of the provisions that apply to the deductibility of casualty losses, and you must complete lines 1–9 according to the Instructions for Form 4684. 2011 irs form 8863 This means, for example, that you must establish that the damage, destruction, or loss of property resulted from an identifiable event as defined earlier under Casualty . 2011 irs form 8863 Furthermore, you must have proof that shows the following. 2011 irs form 8863 The loss is properly deductible in the tax year you claimed it and not in some other year. 2011 irs form 8863 See When To Report Gains and Losses , later. 2011 irs form 8863 The amount of the claimed loss. 2011 irs form 8863 See Proof of Loss , later. 2011 irs form 8863 No claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery. 2011 irs form 8863 See When To Report Gains and Losses , later. 2011 irs form 8863 Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. 2011 irs form 8863 The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. 2011 irs form 8863 You do not need to show a conviction for theft. 2011 irs form 8863 Theft includes the taking of money or property by the following means. 2011 irs form 8863 Blackmail. 2011 irs form 8863 Burglary. 2011 irs form 8863 Embezzlement. 2011 irs form 8863 Extortion. 2011 irs form 8863 Kidnapping for ransom. 2011 irs form 8863 Larceny. 2011 irs form 8863 Robbery. 2011 irs form 8863 The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. 2011 irs form 8863 Decline in market value of stock. 2011 irs form 8863   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. 2011 irs form 8863 However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. 2011 irs form 8863 You report a capital loss on Schedule D (Form 1040). 2011 irs form 8863 For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. 2011 irs form 8863 Mislaid or lost property. 2011 irs form 8863    The simple disappearance of money or property is not a theft. 2011 irs form 8863 However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. 2011 irs form 8863 Sudden, unexpected, and unusual events were defined earlier under Casualty . 2011 irs form 8863 Example. 2011 irs form 8863 A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. 2011 irs form 8863 The diamond falls from the ring and is never found. 2011 irs form 8863 The loss of the diamond is a casualty. 2011 irs form 8863 Losses from Ponzi-type investment schemes. 2011 irs form 8863   The IRS has issued the following guidance to assist taxpayers who are victims of losses from Ponzi-type investment schemes: Revenue Ruling 2009-9, 2009-14 I. 2011 irs form 8863 R. 2011 irs form 8863 B. 2011 irs form 8863 735 (available at www. 2011 irs form 8863 irs. 2011 irs form 8863 gov/irb/2009-14_IRB/ar07. 2011 irs form 8863 html). 2011 irs form 8863 Revenue Procedure 2009-20, 2009-14 I. 2011 irs form 8863 R. 2011 irs form 8863 B. 2011 irs form 8863 749 (available at www. 2011 irs form 8863 irs. 2011 irs form 8863 gov/irb/2009-14_IRB/ar11. 2011 irs form 8863 html). 2011 irs form 8863 Revenue Procedure 2011-58, 2011-50 I. 2011 irs form 8863 R. 2011 irs form 8863 B. 2011 irs form 8863 847 (available at www. 2011 irs form 8863 irs. 2011 irs form 8863 gov/irb/2011-50_IRB/ar11. 2011 irs form 8863 html). 2011 irs form 8863 If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. 2011 irs form 8863 Skip lines 19 to 27, but you must fill out Section B, lines 29 to 39, as appropriate. 2011 irs form 8863 Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. 2011 irs form 8863 You do not need to complete Appendix A. 2011 irs form 8863 For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. 2011 irs form 8863   If you choose not to use the procedures in Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. 2011 irs form 8863 Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. 2011 irs form 8863 If you incurred this type of loss, you can choose one of the following ways to deduct the loss. 2011 irs form 8863 As a casualty loss. 2011 irs form 8863 As an ordinary loss. 2011 irs form 8863 As a nonbusiness bad debt. 2011 irs form 8863 Casualty loss or ordinary loss. 2011 irs form 8863   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. 2011 irs form 8863 The choice generally is made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. 2011 irs form 8863 If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. 2011 irs form 8863 However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. 2011 irs form 8863 Once you make the choice, you cannot change it without permission from the Internal Revenue Service. 2011 irs form 8863   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. 2011 irs form 8863 The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. 2011 irs form 8863 Your loss is subject to the 2%-of-adjusted-gross-income limit. 2011 irs form 8863 You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. 2011 irs form 8863 Nonbusiness bad debt. 2011 irs form 8863   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. 2011 irs form 8863 How to report. 2011 irs form 8863   The kind of deduction you choose for your loss on deposits determines how you report your loss. 2011 irs form 8863 See Table 1. 2011 irs form 8863 More information. 2011 irs form 8863   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684. 2011 irs form 8863 Deducted loss recovered. 2011 irs form 8863   If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of recovery. 2011 irs form 8863 If any part of the original deduction did not reduce your tax in the earlier year, you do not have to include that part of the recovery in your income. 2011 irs form 8863 For more information, see Recoveries in Publication 525. 2011 irs form 8863 Proof of Loss To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. 2011 irs form 8863 You also must be able to support the amount you take as a deduction. 2011 irs form 8863 Casualty loss proof. 2011 irs form 8863   For a casualty loss, you should be able to show all of the following. 2011 irs form 8863 The type of casualty (car accident, fire, storm, etc. 2011 irs form 8863 ) and when it occurred. 2011 irs form 8863 That the loss was a direct result of the casualty. 2011 irs form 8863 That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage. 2011 irs form 8863 Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. 2011 irs form 8863 Theft loss proof. 2011 irs form 8863   For a theft loss, you should be able to show all of the following. 2011 irs form 8863 When you discovered that your property was missing. 2011 irs form 8863 That your property was stolen. 2011 irs form 8863 That you were the owner of the property. 2011 irs form 8863 Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. 2011 irs form 8863    It is important that you have records that will prove your deduction. 2011 irs form 8863 If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. 2011 irs form 8863 Figuring a Loss To determine your deduction for a casualty or theft loss, you must first figure your loss. 2011 irs form 8863 Table 1. 2011 irs form 8863 Reporting Loss on Deposits IF you choose to report the loss as a(n). 2011 irs form 8863 . 2011 irs form 8863 . 2011 irs form 8863   THEN report it on. 2011 irs form 8863 . 2011 irs form 8863 . 2011 irs form 8863 casualty loss   Form 4684 and Schedule A  (Form 1040). 2011 irs form 8863 ordinary loss   Schedule A (Form 1040). 2011 irs form 8863 nonbusiness bad debt   Form 8949 and Schedule D (Form 1040). 2011 irs form 8863 Amount of loss. 2011 irs form 8863   Figure the amount of your loss using the following steps. 2011 irs form 8863 Determine your adjusted basis in the property before the casualty or theft. 2011 irs form 8863 Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. 2011 irs form 8863 From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. 2011 irs form 8863 For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. 2011 irs form 8863 Gain from reimbursement. 2011 irs form 8863   If your reimbursement is more than your adjusted basis in the property, you have a gain. 2011 irs form 8863 This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. 2011 irs form 8863 If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. 2011 irs form 8863 See Figuring a Gain , later. 2011 irs form 8863 Business or income-producing property. 2011 irs form 8863   If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not considered. 2011 irs form 8863 Your loss is figured as follows:   Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive   Loss of inventory. 2011 irs form 8863   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers. 2011 irs form 8863   One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. 2011 irs form 8863 Do not claim this loss again as a casualty or theft loss. 2011 irs form 8863 If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income. 2011 irs form 8863   The other way is to deduct the loss separately. 2011 irs form 8863 If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. 2011 irs form 8863 Reduce the loss by the reimbursement you received. 2011 irs form 8863 Do not include the reimbursement in gross income. 2011 irs form 8863 If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery. 2011 irs form 8863 Leased property. 2011 irs form 8863   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. 2011 irs form 8863 Separate computations. 2011 irs form 8863   Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. 2011 irs form 8863 Then combine the losses to determine the total loss from that casualty or theft. 2011 irs form 8863 Exception for personal-use real property. 2011 irs form 8863   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. 2011 irs form 8863 Figure the loss using the smaller of the following. 2011 irs form 8863 The decrease in FMV of the entire property. 2011 irs form 8863 The adjusted basis of the entire property. 2011 irs form 8863   See Real property under Figuring the Deduction, later. 2011 irs form 8863 Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. 2011 irs form 8863 The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. 2011 irs form 8863 FMV of stolen property. 2011 irs form 8863   The FMV of property immediately after a theft is considered to be zero because you no longer have the property. 2011 irs form 8863 Example. 2011 irs form 8863 Several years ago, you purchased silver dollars at face value for $150. 2011 irs form 8863 This is your adjusted basis in the property. 2011 irs form 8863 Your silver dollars were stolen this year. 2011 irs form 8863 The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. 2011 irs form 8863 Your theft loss is $150. 2011 irs form 8863 Recovered stolen property. 2011 irs form 8863   Recovered stolen property is your property that was stolen and later returned to you. 2011 irs form 8863 If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. 2011 irs form 8863 Use this amount to refigure your total loss for the year in which the loss was deducted. 2011 irs form 8863   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. 2011 irs form 8863 But report the difference only up to the amount of the loss that reduced your tax. 2011 irs form 8863 For more information on the amount to report, see Recoveries in Publication 525. 2011 irs form 8863 Figuring Decrease in FMV — Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. 2011 irs form 8863 However, other measures also can be used to establish certain decreases. 2011 irs form 8863 See Appraisal and Cost of cleaning up or making repairs , next. 2011 irs form 8863 Appraisal. 2011 irs form 8863   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards should be made by a competent appraiser. 2011 irs form 8863 The appraiser must recognize the effects of any general market decline that may occur along with the casualty. 2011 irs form 8863 This information is needed to limit any deduction to the actual loss resulting from damage to the property. 2011 irs form 8863   Several factors are important in evaluating the accuracy of an appraisal, including the following. 2011 irs form 8863 The appraiser's familiarity with your property before and after the casualty or theft. 2011 irs form 8863 The appraiser's knowledge of sales of comparable property in the area. 2011 irs form 8863 The appraiser's knowledge of conditions in the area of the casualty. 2011 irs form 8863 The appraiser's method of appraisal. 2011 irs form 8863 You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. 2011 irs form 8863 For more information on disasters, see Disaster Area Losses, later. 2011 irs form 8863 Cost of cleaning up or making repairs. 2011 irs form 8863   The cost of repairing damaged property is not part of a casualty loss. 2011 irs form 8863 Neither is the cost of cleaning up after a casualty. 2011 irs form 8863 But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. 2011 irs form 8863 The repairs are actually made. 2011 irs form 8863 The repairs are necessary to bring the property back to its condition before the casualty. 2011 irs form 8863 The amount spent for repairs is not excessive. 2011 irs form 8863 The repairs take care of the damage only. 2011 irs form 8863 The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. 2011 irs form 8863 Landscaping. 2011 irs form 8863   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. 2011 irs form 8863 You may be able to measure your loss by what you spend on the following. 2011 irs form 8863 Removing destroyed or damaged trees and shrubs, minus any salvage you receive. 2011 irs form 8863 Pruning and other measures taken to preserve damaged trees and shrubs. 2011 irs form 8863 Replanting necessary to restore the property to its approximate value before the casualty. 2011 irs form 8863 Car value. 2011 irs form 8863   Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. 2011 irs form 8863 You can use the books' retail values and modify them by factors such as the mileage and condition of your car to figure its value. 2011 irs form 8863 The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. 2011 irs form 8863 If your car is not listed in the books, determine its value from other sources. 2011 irs form 8863 A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. 2011 irs form 8863 Figuring Decrease in FMV — Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. 2011 irs form 8863 Cost of protection. 2011 irs form 8863   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. 2011 irs form 8863 The amount you spend on insurance or to board up your house against a storm is not part of your loss. 2011 irs form 8863 If the property is business property, these expenses are deductible as business expenses. 2011 irs form 8863   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. 2011 irs form 8863 An example would be the cost of a dike to prevent flooding. 2011 irs form 8863 Exception. 2011 irs form 8863   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments (discussed later under Disaster Area Losses ). 2011 irs form 8863 Related expenses. 2011 irs form 8863   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. 2011 irs form 8863 However, they may be deductible as business expenses if the damaged or stolen property is business property. 2011 irs form 8863 Replacement cost. 2011 irs form 8863   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. 2011 irs form 8863 Example. 2011 irs form 8863 You bought a new chair 4 years ago for $300. 2011 irs form 8863 In April, a fire destroyed the chair. 2011 irs form 8863 You estimate that it would cost $500 to replace it. 2011 irs form 8863 If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. 2011 irs form 8863 The chair was not insured. 2011 irs form 8863 Your loss is $100, the FMV of the chair before the fire. 2011 irs form 8863 It is not $500, the replacement cost. 2011 irs form 8863 Sentimental value. 2011 irs form 8863   Do not consider sentimental value when determining your loss. 2011 irs form 8863 If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. 2011 irs form 8863 Decline in market value of property in or near casualty area. 2011 irs form 8863   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. 2011 irs form 8863 You have a loss only for actual casualty damage to your property. 2011 irs form 8863 However, if your home is in a federally declared disaster area, see Disaster Area Losses , later. 2011 irs form 8863 Costs of photographs and appraisals. 2011 irs form 8863   Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. 2011 irs form 8863 Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. 2011 irs form 8863   Appraisals are used to figure the decrease in FMV because of a casualty or theft. 2011 irs form 8863 See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. 2011 irs form 8863   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. 2011 irs form 8863 They are expenses in determining your tax liability. 2011 irs form 8863 You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). 2011 irs form 8863 Adjusted Basis The measure of your investment in the property you own is its basis. 2011 irs form 8863 For property you buy, your basis is usually its cost to you. 2011 irs form 8863 For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551. 2011 irs form 8863 If you inherited the property from someone who died in 2010 and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. 2011 irs form 8863 Adjustments to basis. 2011 irs form 8863    While you own the property, various events may take place that change your basis. 2011 irs form 8863 Some events, such as additions or permanent improvements to the property, increase basis. 2011 irs form 8863 Others, such as earlier casualty losses and depreciation deductions, decrease basis. 2011 irs form 8863 When you add the increases to the basis and subtract the decreases from the basis, the result is your adjusted basis. 2011 irs form 8863 See Publication 551 for more information on figuring the basis of your property. 2011 irs form 8863 Insurance and Other Reimbursements If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. 2011 irs form 8863 You do not have a casualty or theft loss to the extent you are reimbursed. 2011 irs form 8863 If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. 2011 irs form 8863 You must reduce your loss even if you do not receive payment until a later tax year. 2011 irs form 8863 See Reimbursement Received After Deducting Loss , later. 2011 irs form 8863 Failure to file a claim for reimbursement. 2011 irs form 8863   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. 2011 irs form 8863 Otherwise, you cannot deduct this loss as a casualty or theft. 2011 irs form 8863 The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. 2011 irs form 8863 Example. 2011 irs form 8863 You have a car insurance policy with a $1,000 deductible. 2011 irs form 8863 Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the $100 and 10% rules, discussed later). 2011 irs form 8863 This is true, even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. 2011 irs form 8863 Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. 2011 irs form 8863 Other types of reimbursements are discussed next. 2011 irs form 8863 Also see the Instructions for Form 4684. 2011 irs form 8863 Employer's emergency disaster fund. 2011 irs form 8863   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. 2011 irs form 8863 Take into consideration only the amount you used to replace your destroyed or damaged property. 2011 irs form 8863 Example. 2011 irs form 8863 Your home was extensively damaged by a tornado. 2011 irs form 8863 Your loss after reimbursement from your insurance company was $10,000. 2011 irs form 8863 Your employer set up a disaster relief fund for its employees. 2011 irs form 8863 Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. 2011 irs form 8863 You received $4,000 from the fund and spent the entire amount on repairs to your home. 2011 irs form 8863 In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. 2011 irs form 8863 Your casualty loss before applying the deduction limits (discussed later) is $6,000. 2011 irs form 8863 Cash gifts. 2011 irs form 8863   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. 2011 irs form 8863 This applies even if you use the money to pay for repairs to property damaged in the disaster. 2011 irs form 8863 Example. 2011 irs form 8863 Your home was damaged by a hurricane. 2011 irs form 8863 Relatives and neighbors made cash gifts to you that were excludable from your income. 2011 irs form 8863 You used part of the cash gifts to pay for repairs to your home. 2011 irs form 8863 There were no limits or restrictions on how you could use the cash gifts. 2011 irs form 8863 It was an excludable gift, so the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. 2011 irs form 8863 Insurance payments for living expenses. 2011 irs form 8863   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. 2011 irs form 8863 You lose the use of your main home because of a casualty. 2011 irs form 8863 Government authorities do not allow you access to your main home because of a casualty or threat of one. 2011 irs form 8863 Inclusion in income. 2011 irs form 8863   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. 2011 irs form 8863 Report this amount on Form 1040, line 21. 2011 irs form 8863 However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. 2011 irs form 8863 See Qualified disaster relief payments , later, under Disaster Area Losses. 2011 irs form 8863   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. 2011 irs form 8863 Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. 2011 irs form 8863 Generally, these expenses include the amounts you pay for the following. 2011 irs form 8863 Renting suitable housing. 2011 irs form 8863 Transportation. 2011 irs form 8863 Food. 2011 irs form 8863 Utilities. 2011 irs form 8863 Miscellaneous services. 2011 irs form 8863 Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. 2011 irs form 8863 Example. 2011 irs form 8863 As a result of a fire, you vacated your apartment for a month and moved to a motel. 2011 irs form 8863 You normally pay $525 a month for rent. 2011 irs form 8863 None was charged for the month the apartment was vacated. 2011 irs form 8863 Your motel rent for this month was $1,200. 2011 irs form 8863 You normally pay $200 a month for food. 2011 irs form 8863 Your food expenses for the month you lived in the motel were $400. 2011 irs form 8863 You received $1,100 from your insurance company to cover your living expenses. 2011 irs form 8863 You determine the payment you must include in income as follows. 2011 irs form 8863 1. 2011 irs form 8863 Insurance payment for living expenses $1,100 2. 2011 irs form 8863 Actual expenses during the month you are unable to use your home because of the fire $1,600   3. 2011 irs form 8863 Normal living expenses 725   4. 2011 irs form 8863 Temporary increase in living expenses: Subtract line 3  from line 2 875 5. 2011 irs form 8863 Amount of payment includible in income: Subtract line 4 from line 1 $ 225 Tax year of inclusion. 2011 irs form 8863   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. 2011 irs form 8863 Example. 2011 irs form 8863 Your main home was destroyed by a tornado in August 2011. 2011 irs form 8863 You regained use of your home in November 2012. 2011 irs form 8863 The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. 2011 irs form 8863 You include this amount in income on your 2012 Form 1040. 2011 irs form 8863 If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. 2011 irs form 8863 Disaster relief. 2011 irs form 8863   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. 2011 irs form 8863 Table 2. 2011 irs form 8863 Deduction Limit Rules for Personal-Use and Employee Property       $100 Rule 10% Rule 2% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. 2011 irs form 8863 Apply this rule to personal-use property after you have figured the amount of your loss. 2011 irs form 8863 You must reduce your total casualty or theft loss by 10% of your adjusted gross income. 2011 irs form 8863 Apply this rule to personal-use property after you reduce each loss by $100 (the $100 rule). 2011 irs form 8863 You must reduce your total casualty or theft loss by 2% of your adjusted gross income. 2011 irs form 8863 Apply this rule to property you used in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous itemized deductions. 2011 irs form 8863 Single Event Apply this rule only once, even if many pieces of property are affected. 2011 irs form 8863 Apply this rule only once, even if many pieces of property are affected. 2011 irs form 8863 Apply this rule only once, even if many pieces of property are affected. 2011 irs form 8863 More Than One Event Apply to the loss from each event. 2011 irs form 8863 Apply to the total of all your losses from all events. 2011 irs form 8863 Apply to the total of all your losses from all events. 2011 irs form 8863 More Than One Person— With Loss From the   Same Event  (other than a married couple  filing jointly) Apply separately to each person. 2011 irs form 8863 Apply separately to each person. 2011 irs form 8863 Apply separately to each person. 2011 irs form 8863 Married Couple—  With Loss From the  Same Event Filing Joint Return Apply as if you were one person. 2011 irs form 8863 Apply as if you were one person. 2011 irs form 8863 Apply as if you were one person. 2011 irs form 8863 Filing Separate Return Apply separately to each spouse. 2011 irs form 8863 Apply separately to each spouse. 2011 irs form 8863 Apply separately to each spouse. 2011 irs form 8863 More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. 2011 irs form 8863 Apply separately to each owner of jointly owned property. 2011 irs form 8863 Apply separately to each owner of jointly owned property. 2011 irs form 8863    Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster, are not taxable income to you. 2011 irs form 8863 For more information, see Qualified disaster relief payments under Disaster Area Losses, later. 2011 irs form 8863   Disaster unemployment assistance payments are unemployment benefits that are taxable. 2011 irs form 8863   Generally, disaster relief grants received under the Robert T. 2011 irs form 8863 Stafford Disaster Relief and Emergency Assistance Act are not included in your income. 2011 irs form 8863 See Federal disaster relief grants , later, under Disaster Area Losses. 2011 irs form 8863 Loan proceeds. 2011 irs form 8863   Do not reduce your casualty loss by loan proceeds you use to rehabilitate or replace property on which you are claiming a casualty loss deduction. 2011 irs form 8863 If you have a federal loan that is canceled (forgiven), see Federal loan canceled , later, under Disaster Area Losses. 2011 irs form 8863 Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. 2011 irs form 8863 This section explains the adjustment you may have to make. 2011 irs form 8863 Actual reimbursement less than expected. 2011 irs form 8863   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. 2011 irs form 8863 Example. 2011 irs form 8863 Your personal car had a FMV of $2,000 when it was destroyed in a collision with another car in 2012. 2011 irs form 8863 The accident was due to the negligence of the other driver. 2011 irs form 8863 At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. 2011 irs form 8863 You did not have a deductible loss in 2012. 2011 irs form 8863 In January 2013, the court awards you a judgment of $2,000. 2011 irs form 8863 However, in July it becomes apparent that you will be unable to collect any amount from the other driver. 2011 irs form 8863 Since this is your only casualty or theft loss, you can deduct the loss in 2013 that is figured by applying the Deduction Limits (discussed later). 2011 irs form 8863 Actual reimbursement more than expected. 2011 irs form 8863   If you later receive more reimbursement than you expected, after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. 2011 irs form 8863 However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. 2011 irs form 8863 You do not refigure your tax for the year you claimed the deduction. 2011 irs form 8863 See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. 2011 irs form 8863 Example. 2011 irs form 8863 In 2012, a hurricane destroyed your motorboat. 2011 irs form 8863 Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. 2011 irs form 8863 You did not itemize deductions on your 2012 return, so you could not deduct the loss. 2011 irs form 8863 When the insurance company reimburses you for the loss, you do not report any of the reimbursement as income. 2011 irs form 8863 This is true even if it is for the full $3,000 because you did not deduct the loss on your 2012 return. 2011 irs form 8863 The loss did not reduce your tax. 2011 irs form 8863    If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. 2011 irs form 8863 If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. 2011 irs form 8863 Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. 2011 irs form 8863 You may be able to postpone reporting any remaining gain as explained under Postponement of Gain, later. 2011 irs form 8863 Actual reimbursement same as expected. 2011 irs form 8863   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. 2011 irs form 8863 Example. 2011 irs form 8863 In December 2013, you had a collision while driving your personal car. 2011 irs form 8863 Repairs to the car cost $950. 2011 irs form 8863 You had $100 deductible collision insurance. 2011 irs form 8863 Your insurance company agreed to reimburse you for the rest of the damage. 2011 irs form 8863 Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. 2011 irs form 8863 Due to the $100 rule, you cannot deduct the $100 you paid as the deductible. 2011 irs form 8863 When you receive the $850 from the insurance company in 2014, do not report it as income. 2011 irs form 8863 Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. 2011 irs form 8863 The deduction for casualty and theft losses of employee property and personal-use property is limited. 2011 irs form 8863 A loss on employee property is subject to the 2% rule, discussed next. 2011 irs form 8863 With certain exceptions, a loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. 2011 irs form 8863 The 2%, $100, and 10% rules are also summarized in Table 2 . 2011 irs form 8863 Losses on business property (other than employee property) and income-producing property are not subject to these rules. 2011 irs form 8863 However, if your casualty or theft loss involved a home you used for business or rented out, your deductible loss may be limited. 2011 irs form 8863 See the Instructions for Form 4684, Section B. 2011 irs form 8863 If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions. 2011 irs form 8863 2% Rule The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040) or Form 1040NR, Schedule A, must be reduced by 2% of your adjusted gross income. 2011 irs form 8863 Employee property is property used in performing services as an employee. 2011 irs form 8863 $100 Rule After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. 2011 irs form 8863 This reduction applies to each total casualty or theft loss. 2011 irs form 8863 It does not matter how many pieces of property are involved in an event. 2011 irs form 8863 Only a single $100 reduction applies. 2011 irs form 8863 Example. 2011 irs form 8863 You have $750 deductible collision insurance on your car. 2011 irs form 8863 The car is damaged in a collision. 2011 irs form 8863 The insurance company pays you for the damage minus the $750 deductible. 2011 irs form 8863 The amount of the casualty loss is based solely on the deductible. 2011 irs form 8863 The casualty loss is $650 ($750 − $100) because the first $100 of a casualty loss on personal-use property is not deductible. 2011 irs form 8863 Single event. 2011 irs form 8863   Generally, events closely related in origin cause a single casualty. 2011 irs form 8863 It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. 2011 irs form 8863 A single casualty may also damage two or more pieces of property, such as a hailstorm that damages both your home and your car parked in your driveway. 2011 irs form 8863 Example 1. 2011 irs form 8863 A thunderstorm destroyed your pleasure boat. 2011 irs form 8863 You also lost some boating equipment in the storm. 2011 irs form 8863 Your loss was $5,000 on the boat and $1,200 on the equipment. 2011 irs form 8863 Your insurance company reimbursed you $4,500 for the damage to your boat. 2011 irs form 8863 You had no insurance coverage on the equipment. 2011 irs form 8863 Your casualty loss is from a single event and the $100 rule applies once. 2011 irs form 8863 Figure your loss before applying the 10% rule (discussed later) as follows. 2011 irs form 8863     Boat Equipment 1. 2011 irs form 8863 Loss $5,000 $1,200 2. 2011 irs form 8863 Subtract insurance 4,500 -0- 3. 2011 irs form 8863 Loss after reimbursement $ 500 $1,200 4. 2011 irs form 8863 Total loss $1,700 5. 2011 irs form 8863 Subtract $100 100 6. 2011 irs form 8863 Loss before 10% rule $1,600 Example 2. 2011 irs form 8863 Thieves broke into your home in January and stole a ring and a fur coat. 2011 irs form 8863 You had a loss of $200 on the ring and $700 on the coat. 2011 irs form 8863 This is a single theft. 2011 irs form 8863 The $100 rule applies to the total $900 loss. 2011 irs form 8863 Example 3. 2011 irs form 8863 In September, hurricane winds blew the roof off your home. 2011 irs form 8863 Flood waters caused by the hurricane further damaged your home and destroyed your furniture and personal car. 2011 irs form 8863 This is considered a single casualty. 2011 irs form 8863 The $100 rule is applied to your total loss from the flood waters and the wind. 2011 irs form 8863 More than one loss. 2011 irs form 8863   If you have more than one casualty or theft loss during your tax year, you must reduce each loss by $100. 2011 irs form 8863 Example. 2011 irs form 8863 Your family car was damaged in an accident in January. 2011 irs form 8863 Your loss after the insurance reimbursement was $75. 2011 irs form 8863 In February, your car was damaged in another accident. 2011 irs form 8863 This time your loss after the insurance reimbursement was $90. 2011 irs form 8863 Apply the $100 rule to each separate casualty loss. 2011 irs form 8863 Since neither accident resulted in a loss of over $100, you are not entitled to any deduction for these accidents. 2011 irs form 8863 More than one person. 2011 irs form 8863   If two or more individuals (other than a husband and wife filing a joint return) have losses from the same casualty or theft, the $100 rule applies separately to each individual. 2011 irs form 8863 Example. 2011 irs form 8863 A fire damaged your house and also damaged the personal property of your house guest. 2011 irs form 8863 You must reduce your loss by $100. 2011 irs form 8863 Your house guest must reduce his or her loss by $100. 2011 irs form 8863 Married taxpayers. 2011 irs form 8863   If you and your spouse file a joint return, you are treated as one individual in applying the $100 rule. 2011 irs form 8863 It does not matter whether you own the property jointly or separately. 2011 irs form 8863   If you and your spouse have a casualty or theft loss and you file separate returns, each of you must reduce your loss by $100. 2011 irs form 8863 This is true even if you own the property jointly. 2011 irs form 8863 If one spouse owns the property, only that spouse can figure a loss deduction on a separate return. 2011 irs form 8863   If the casualty or theft loss is on property you own as tenants by the entirety, each of you can figure your deduction on only one-half of the loss on separate returns. 2011 irs form 8863 Neither of you can figure your deduction on the entire loss on a separate return. 2011 irs form 8863 Each of you must reduce the loss by $100. 2011 irs form 8863 More than one owner. 2011 irs form 8863   If two or more individuals (other than a husband and wife filing a joint return) have a loss on property jointly owned, the $100 rule applies separately to each. 2011 irs form 8863 For example, if two sisters live together in a home they own jointly and they have a casualty loss on the home, the $100 rule applies separately to each sister. 2011 irs form 8863 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. 2011 irs form 8863 Apply this rule after you reduce each loss by $100. 2011 irs form 8863 For more information, see the Form 4684 instructions. 2011 irs form 8863 If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. 2011 irs form 8863 Example. 2011 irs form 8863 In June, you discovered that your house had been burglarized. 2011 irs form 8863 Your loss after insurance reimbursement was $2,000. 2011 irs form 8863 Your adjusted gross income for the year you discovered the theft is $29,500. 2011 irs form 8863 Figure your theft loss as follows. 2011 irs form 8863 1. 2011 irs form 8863 Loss after insurance $2,000 2. 2011 irs form 8863 Subtract $100 100 3. 2011 irs form 8863 Loss after $100 rule $1,900 4. 2011 irs form 8863 Subtract 10% of $29,500 AGI $2,950 5. 2011 irs form 8863 Theft loss deduction $-0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950). 2011 irs form 8863 More than one loss. 2011 irs form 8863   If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. 2011 irs form 8863 Then you must reduce the total of all your losses by 10% of your adjusted gross income. 2011 irs form 8863 Example. 2011 irs form 8863 In March, you had a car accident that totally destroyed your car. 2011 irs form 8863 You did not have collision insurance on your car, so you did not receive any insurance reimbursement. 2011 irs form 8863 Your loss on the car was $1,800. 2011 irs form 8863 In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items you had stored there. 2011 irs form 8863 Your loss on the basement items after reimbursement was $2,100. 2011 irs form 8863 Your adjusted gross income for the year that the accident and fire occurred is $25,000. 2011 irs form 8863 You figure your casualty loss deduction as follows. 2011 irs form 8863     Car Basement 1. 2011 irs form 8863 Loss $1,800 $2,100 2. 2011 irs form 8863 Subtract $100 per incident 100 100 3. 2011 irs form 8863 Loss after $100 rule $1,700 $2,000 4. 2011 irs form 8863 Total loss $3,700 5. 2011 irs form 8863 Subtract 10% of $25,000 AGI 2,500 6. 2011 irs form 8863 Casualty loss deduction $1,200 Married taxpayers. 2011 irs form 8863   If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. 2011 irs form 8863 It does not matter if you own the property jointly or separately. 2011 irs form 8863   If you file separate returns, the 10% rule applies to each return on which a loss is claimed. 2011 irs form 8863 More than one owner. 2011 irs form 8863   If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies separately to each. 2011 irs form 8863 Gains and losses. 2011 irs form 8863   If you have casualty or theft gains as well as losses to personal-use property, you must compare your total gains to your total losses. 2011 irs form 8863 Do this after you have reduced each loss by any reimbursements and by $100 but before you have reduced the losses by 10% of your adjusted gross income. 2011 irs form 8863 Casualty or theft gains do not include gains you choose to postpone. 2011 irs form 8863 See Postponement of Gain, later. 2011 irs form 8863 Losses more than gains. 2011 irs form 8863   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. 2011 irs form 8863 The rest, if any, is your deductible loss from personal-use property. 2011 irs form 8863 Example. 2011 irs form 8863 Your theft loss after reducing it by reimbursements and by $100 is $2,700. 2011 irs form 8863 Your casualty gain is $700. 2011 irs form 8863 Your loss is more than your gain, so you must reduce your $2,000 net loss ($2,700 − $700) by 10% of your adjusted gross income. 2011 irs form 8863 Gains more than losses. 2011 irs form 8863   If your recognized gains are more than your losses, subtract your losses from your gains. 2011 irs form 8863 The difference is treated as a capital gain and must be reported on Schedule D (Form 1040). 2011 irs form 8863 The 10% rule does not apply to your gains. 2011 irs form 8863 Example. 2011 irs form 8863 Your theft loss is $600 after reducing it by reimbursements and by $100. 2011 irs form 8863 Your casualty gain is $1,600. 2011 irs form 8863 Because your gain is more than your loss, you must report the $1,000 net gain ($1,600 − $600) on Schedule D (Form 1040). 2011 irs form 8863 More information. 2011 irs form 8863   For information on how to figure recognized gains, see Figuring a Gain , later. 2011 irs form 8863 Figuring the Deduction Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. 2011 irs form 8863 However, a special rule applies to real property you own for personal use. 2011 irs form 8863 Real property. 2011 irs form 8863   In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. 2011 irs form 8863 Example 1. 2011 irs form 8863 In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. 2011 irs form 8863 (Your land was not damaged. 2011 irs form 8863 ) This was your only casualty or theft loss for the year. 2011 irs form 8863 The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). 2011 irs form 8863 The FMV immediately after the fire was $35,000 (value of the land). 2011 irs form 8863 You collected $130,000 from the insurance company. 2011 irs form 8863 Your adjusted gross income for the year the fire occurred is $80,000. 2011 irs form 8863 Your deduction for the casualty loss is $6,700, figured in the following manner. 2011 irs form 8863 1. 2011 irs form 8863 Adjusted basis of the entire property (cost in this example) $144,800 2. 2011 irs form 8863 FMV of entire property  before fire $180,000 3. 2011 irs form 8863 FMV of entire property after fire 35,000 4. 2011 irs form 8863 Decrease in FMV of entire property (line 2 − line 3) $145,000 5. 2011 irs form 8863 Loss (smaller of line 1 or line 4) $144,800 6. 2011 irs form 8863 Subtract insurance 130,000 7. 2011 irs form 8863 Loss after reimbursement $14,800 8. 2011 irs form 8863 Subtract $100 100 9. 2011 irs form 8863 Loss after $100 rule $14,700 10. 2011 irs form 8863 Subtract 10% of $80,000 AGI 8,000 11. 2011 irs form 8863 Casualty loss deduction $ 6,700 Example 2. 2011 irs form 8863 You bought your home a few years ago. 2011 irs form 8863 You paid $150,000 ($10,000 for the land and $140,000 for the house). 2011 irs form 8863 You also spent an additional $2,000 for landscaping. 2011 irs form 8863 This year a fire destroyed your home. 2011 irs form 8863 The fire also damaged the shrubbery and trees in your yard. 2011 irs form 8863 The fire was your only casualty or theft loss this year. 2011 irs form 8863 Competent appraisers valued the property as a whole at $175,000 before the fire, but only $50,000 after the fire. 2011 irs form 8863 Shortly after the fire, the insurance company paid you $95,000 for the loss. 2011 irs form 8863 Your adjusted gross income for this year is $70,000. 2011 irs form 8863 You figure your casualty loss deduction as follows. 2011 irs form 8863 1. 2011 irs form 8863 Adjusted basis of the entire property (cost of land, building, and landscaping) $152,000 2. 2011 irs form 8863 FMV of entire property  before fire $175,000 3. 2011 irs form 8863 FMV of entire property after fire 50,000 4. 2011 irs form 8863 Decrease in FMV of entire property (line 2 − line 3) $125,000 5. 2011 irs form 8863 Loss (smaller of line 1 or line 4) $125,000 6. 2011 irs form 8863 Subtract insurance 95,000 7. 2011 irs form 8863 Loss after reimbursement $30,000 8. 2011 irs form 8863 Subtract $100 100 9. 2011 irs form 8863 Loss after $100 rule $29,900 10. 2011 irs form 8863 Subtract 10% of $70,000 AGI 7,000 11. 2011 irs form 8863 Casualty loss deduction $ 22,900 Personal property. 2011 irs form 8863   Personal property is any property that is not real property. 2011 irs form 8863 If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. 2011 irs form 8863 Then combine these separate losses to figure the total loss. 2011 irs form 8863 Reduce the total loss by $100 and 10% of your adjusted gross income to figure the loss deduction. 2011 irs form 8863 Example 1. 2011 irs form 8863 In August, a storm destroyed your pleasure boat, which cost $18,500. 2011 irs form 8863 This was your only casualty or theft loss for the year. 2011 irs form 8863 Its FMV immediately before the storm was $17,000. 2011 irs form 8863 You had no insurance, but were able to salvage the motor of the boat and sell it for $200. 2011 irs form 8863 Your adjusted gross income for the year the casualty occurred is $70,000. 2011 irs form 8863 Although the motor was sold separately, it is part of the boat and not a separate item of property. 2011 irs form 8863 You figure your casualty loss deduction as follows. 2011 irs form 8863 1. 2011 irs form 8863 Adjusted basis (cost in this example) $18,500 2. 2011 irs form 8863 FMV before storm $17,000 3. 2011 irs form 8863 FMV after storm 200 4. 2011 irs form 8863 Decrease in FMV  (line 2 − line 3) $16,800 5. 2011 irs form 8863 Loss (smaller of line 1 or line 4) $16,800 6. 2011 irs form 8863 Subtract insurance -0- 7. 2011 irs form 8863 Loss after reimbursement $16,800 8. 2011 irs form 8863 Subtract $100 100 9. 2011 irs form 8863 Loss after $100 rule $16,700 10. 2011 irs form 8863 Subtract 10% of $70,000 AGI 7,000 11. 2011 irs form 8863 Casualty loss deduction $ 9,700 Example 2. 2011 irs form 8863 In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. 2011 irs form 8863 You had bought the car for $30,000. 2011 irs form 8863 The FMV of the car just before the accident was $17,500. 2011 irs form 8863 Its FMV just after the accident was $180 (scrap value). 2011 irs form 8863 Your insurance company reimbursed you $16,000. 2011 irs form 8863 Your watch was not insured. 2011 irs form 8863 You had purchased it for $250. 2011 irs form 8863 Its FMV just before the accident was $500. 2011 irs form 8863 Your adjusted gross income for the year the accident occurred is $97,000. 2011 irs form 8863 Your casualty loss deduction is zero, figured as follows. 2011 irs form 8863     Car Watch 1. 2011 irs form 8863 Adjusted basis (cost) $30,000 $250 2. 2011 irs form 8863 FMV before accident $17,500 $500 3. 2011 irs form 8863 FMV after accident 180 -0- 4. 2011 irs form 8863 Decrease in FMV (line 2 − line 3) $17,320 $500 5. 2011 irs form 8863 Loss (smaller of line 1 or line 4) $17,320 $250 6. 2011 irs form 8863 Subtract insurance 16,000 -0- 7. 2011 irs form 8863 Loss after reimbursement $1,320 $250 8. 2011 irs form 8863 Total loss $1,570 9. 2011 irs form 8863 Subtract $100 100 10. 2011 irs form 8863 Loss after $100 rule $1,470 11. 2011 irs form 8863 Subtract 10% of $97,000 AGI 9,700 12. 2011 irs form 8863 Casualty loss deduction $ -0- Both real and personal properties. 2011 irs form 8863   When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. 2011 irs form 8863 However, you apply a single $100 reduction to the total loss. 2011 irs form 8863 Then, you apply the 10% rule to figure the casualty loss deduction. 2011 irs form 8863 Example. 2011 irs form 8863 In July, a hurricane damaged your home, which cost you $164,000 including land. 2011 irs form 8863 The FMV of the property (both building and land) immediately before the storm was $170,000 and its FMV immediately after the storm was $100,000. 2011 irs form 8863 Your household furnishings were also damaged. 2011 irs form 8863 You separately figured the loss on each damaged household item and arrived at a total loss of $600. 2011 irs form 8863 You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. 2011 irs form 8863 Your adjusted gross income for the year the hurricane occurred is $65,000. 2011 irs form 8863 You figure your casualty loss deduction from the hurricane in the following manner. 2011 irs form 8863 1. 2011 irs form 8863 Adjusted basis of real property (cost in this example) $164,000 2. 2011 irs form 8863 FMV of real property before hurricane $170,000 3. 2011 irs form 8863 FMV of real property after hurricane 100,000 4. 2011 irs form 8863 Decrease in FMV of real property (line 2 − line 3) $70,000 5. 2011 irs form 8863 Loss on real property (smaller of line 1 or line 4) $70,000 6. 2011 irs form 8863 Subtract insurance 50,000 7. 2011 irs form 8863 Loss on real property after reimbursement $20,000 8. 2011 irs form 8863 Loss on furnishings $600 9. 2011 irs form 8863 Subtract insurance -0- 10. 2011 irs form 8863 Loss on furnishings after reimbursement $600 11. 2011 irs form 8863 Total loss (line 7 plus line 10) $20,600 12. 2011 irs form 8863 Subtract $100 100 13. 2011 irs form 8863 Loss after $100 rule $20,500 14. 2011 irs form 8863 Subtract 10% of $65,000 AGI 6,500 15. 2011 irs form 8863 Casualty loss deduction $14,000 Property used partly for business and partly for personal purposes. 2011 irs form 8863   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use portion and for the business or income-producing portion. 2011 irs form 8863 You must figure each loss separately because the losses attributed to these two uses are figured in two different ways. 2011 irs form 8863 When figuring each loss, allocate the total cost or basis, the FMV before and after the casualty or theft loss, and the insurance or other reimbursement between the business and personal use of the property. 2011 irs form 8863 The $100 rule and the 10% rule apply only to the casualty or theft loss on the personal-use portion of the property. 2011 irs form 8863 Example. 2011 irs form 8863 You own a building that you constructed on leased land. 2011 irs form 8863 You use half of the building for your business and you live in the other half. 2011 irs form 8863 The cost of the building was $400,000. 2011 irs form 8863 You made no further improvements or additions to it. 2011 irs form 8863 A flood in March damaged the entire building. 2011 irs form 8863 The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. 2011 irs form 8863 Your insurance company reimbursed you $40,000 for the flood damage. 2011 irs form 8863 Depreciation on the business part of the building before the flood totaled $24,000. 2011 irs form 8863 Your adjusted gross income for the year the flood occurred is $125,000. 2011 irs form 8863 You have a deductible business casualty loss of $10,000. 2011 irs form 8863 You do not have a deductible personal casualty loss because of the 10% rule. 2011 irs form 8863 You figure your loss as follows. 2011 irs form 8863     Business   Personal     Part   Part 1. 2011 irs form 8863 Cost (total $400,000) $200,000   $200,000 2. 2011 irs form 8863 Subtract depreciation 24,000   -0- 3. 2011 irs form 8863 Adjusted basis $176,000   $200,000 4. 2011 irs form 8863 FMV before flood (total $380,000) $190,000   $190,000 5. 2011 irs form 8863 FMV after flood (total $320,000) 160,000   160,000 6. 2011 irs form 8863 Decrease in FMV  (line 4 − line 5) $30,000   $30,000 7. 2011 irs form 8863 Loss (smaller of line 3 or line 6) $30,000   $30,000 8. 2011 irs form 8863 Subtract insurance 20,000   20,000 9. 2011 irs form 8863 Loss after reimbursement $10,000   $10,000 10. 2011 irs form 8863 Subtract $100 on personal-use property -0-   100 11. 2011 irs form 8863 Loss after $100 rule $10,000   $9,900 12. 2011 irs form 8863 Subtract 10% of $125,000 AGI on personal-use property -0-   12,500 13. 2011 irs form 8863 Deductible business loss $10,000     14. 2011 irs form 8863 Deductible personal loss $-0- Figuring a Gain If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. 2011 irs form 8863 Your gain is figured as follows. 2011 irs form 8863 The amount you receive (discussed next), minus Your adjusted basis in the property at the time of the casualty or theft. 2011 irs form 8863 See Adjusted Basis , earlier, for information on adjusted basis. 2011 irs form 8863 Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. 2011 irs form 8863 Amount you receive. 2011 irs form 8863   The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. 2011 irs form 8863 It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. 2011 irs form 8863 Example. 2011 irs form 8863 A hurricane destroyed your personal residence and the insurance company awarded you $145,000. 2011 irs form 8863 You received $140,000 in cash. 2011 irs form 8863 The remaining $5,000 was paid directly to the holder of a mortgage on the property. 2011 irs form 8863 The amount you received includes the $5,000 reimbursement paid on the mortgage. 2011 irs form 8863 Main home destroyed. 2011 irs form 8863   If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your home. 2011 irs form 8863 You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). 2011 irs form 8863 To exclude a gain, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date it was destroyed. 2011 irs form 8863 For information on this exclusion, see Publication 523. 2011 irs form 8863 If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. 2011 irs form 8863 See Postponement of Gain , later. 2011 irs form 8863 Reporting a gain. 2011 irs form 8863   You generally must report your gain as income in the year you receive the reimbursement. 2011 irs form 8863 However, you do not have to report your gain if you meet certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next. 2011 irs form 8863   For information on how to report a gain, see How To Report Gains and Losses , later. 2011 irs form 8863    If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. 2011 irs form 8863 See 10% Rule under Deduction Limits, earlier. 2011 irs form 8863 Postponement of Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. 2011 irs form 8863 Your basis in the new property is generally the same as your adjusted basis in the property it replaces. 2011 irs form 8863 You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. 2011 irs form 8863 However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. 2011 irs form 8863 You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. 2011 irs form 8863 See Controlling interest in a corporation , later. 2011 irs form 8863 If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. 2011 irs form 8863 To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. 2011 irs form 8863 If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. 2011 irs form 8863 Example. 2011 irs form 8863 In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. 2011 irs form 8863 You made no further improvements or additions to it. 2011 irs form 8863 When a storm destroyed the cottage this January, the cottage was worth $250,000. 2011 irs form 8863 You received $146,000 from the insurance company in March. 2011 irs form 8863 You had a gain of $128,000 ($146,000 − $18,000). 2011 irs form 8863 You spent $144,000 to rebuild the cottage. 2011 irs form 8863 Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. 2011 irs form 8863 Buying replacement property from a related person. 2011 irs form 8863   You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). 2011 irs form 8863 This rule applies to the following taxpayers. 2011 irs form 8863 C corporations. 2011 irs form 8863 Partnerships in which more than 50% of the capital or profits interests is owned by C corporations. 2011 irs form 8863 All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000. 2011 irs form 8863 For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. 2011 irs form 8863 If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. 2011 irs form 8863 If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. 2011 irs form 8863 Exception. 2011 irs form 8863   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the destroyed or stolen property. 2011 irs form 8863 Related persons. 2011 irs form 8863   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. 2011 irs form 8863 For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. 2011 irs form 8863 Death of a taxpayer. 2011 irs form 8863   If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. 2011 irs form 8863 The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by buying replacement property. 2011 irs form 8863 Replacement Property You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. 2011 irs form 8863 Property you acquire as a gift or inheritance does not qualify. 2011 irs form 8863 You do not have to use the same funds you receive as