Question

In 2020, Jessie's business-use equipment was damaged in a casualty. The equipment had a fair market value of $100,000 and an adjusted basis of $70,000 before the casualty. After the casualty, the equipment was worth $60,000 Jessie's received no insurance proceeds. What is the amount of Jessie's casualty loss deduction or her casualty gain in 2020?

Answer 1

A casualty loss/gain is calculated by

• subtracting any insurance or other reimbursement received or expected

from the smaller of the

• decrease in fair market value (FMV) of the property as a result of the casualty or
• the adjusted basis of the property before the casualty.

In the given situation Jessie is not receiving or expecting insurance or reimbursement. Therefore, Casualty Loss/Gain shall be smaller of the following:

• Decrease in fair market value of the business-use equipment as a result of the casualty i. e. $1,00,000(Fair Market Value of equipment before Casualty)-$60,000(Fair Market Value of equipment after Casualty)=$40,000
• The adjusted basis of the business-use equipment before the casualty i.e. $70,000

The smaller of the above is decrease in fair market value of the business-use equipment as a result of the casualty i.e. $40,000.

Therefore, Jessie’s Casualty Loss Deduction in 2020 is $40,000.

Note: We are assuming use of word ‘Worth’ in the question indicates ‘Fair Market Value’.