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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
Or it could be that just the windshield was broken, requiring an easy $500 fix. In this case, it would be reasonable to take the car's fair-market value from before the casualty and simply subtract the cost to repair the windshield. In that case, the car's fair market value after the casualty would be $9,500
Finishing the calculation
Next, you'll subtract the property's fair market value after the casualty from its fair market value immediately before the casualty. In other, non-IRS words, subtract the two values to determine how much damage was done. In the fallen-tree example, we'd start with the $10,000 original value and subtract the $0 new value, giving us a decrease in value of $10,000.
In the example of the broken windshield, we'd take $9,500 from $10,000 to get a decrease in value of $500.
The final step is to add back any insurance reimbursements you receive or expect to receive. If the insurance company pays you $10,000 after the tree destroyed your car, then you'd subtract that from the $10,000 in lost value to get a net change of $0. That means you would not be eligible for a tax deduction
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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