How to Calculate Fair Market Value of Property After a Casualty Loss

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Published on: Oct 22, 2019 | Updated on: Nov 26, 2019

Taking the time to do this calculation could save you big on your next tax return.

Sometimes personal property, like your vehicle, is destroyed through no fault of your own. It could be damaged in a storm, vandalized, or even stolen. When that happens, you may be eligible for a tax deduction that will depend on the fair market value of your property after the casualty loss.

While you should always consult with your own tax advisor to make the proper decision for your specific situation, in this post we'll explain the basics of calculating the fair market value of your property after the casualty loss needed for the tax deduction process.

What was your property worth before the casualty or theft?

The first step is to determine the value of your property immediately preceding the casualty. The IRS requires that you use the fair market value of the property to do this. Fair market value is defined as "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."

To determine your property's fair market value, the best method is to compare the prices others have paid for something comparable. For example, if you want to value your car, you'd refer to a used car guide. The used-car guide is a database of prices that others have paid for cars of similar make, model, age, condition, and mileage. Remember, you are valuing the vehicle at this point based on its condition before the casualty. So the fact that a tree may have fallen on the roof is irrelevant at this point. Let's assume that in this case, the used-car guide assigns a fair market value of $10,000.

The next step is to calculate the property's value immediately following the casualty. This can be a more difficult estimate, depending on the item and the damage that was done. In the example of a tree falling on your car, it could be that the car is totaled and has a fair market value of zero following the casualty.

In the second example, if the insurance company paid you only $250 to fix the $500 windshield, then you'd subtract that $250 reimbursement from the $500 decrease in value, resulting in a net loss of $250 in value. Based on that calculation, you may be eligible to deduct that loss from your taxes and should seek the advice of your own tax professional.

Calculation

Scenario 1 -- Tree Falls, Destroys Car

Scenario 2 -- Windshield Broken, No Other Damage

Fair market value before casualty

$10,000

$10,000

Fair market value after casualty

$0

$9,500

Decrease in fair market value

$10,000

$500

Subtract insurance reimbursement

-$10,000

-$250

Potential tax deduction

$0

$250

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