HOW TO REPORT MULTIPLE ITEMS AS A CASUALTY LOSS

HOW TO REPORT MULTIPLE ITEMS AS A CASUALTY LOSS

(A question asked recently of this blog)

Reporting a loss on multiple items lost in one event presents thorny issues to resolve. On one hand, there are some obvious ways to group items. Generally, we would start with insurance policy coverage categories. Using this one, for a personal loss involving a home, contents, vehicles, and boats, etc. that would be covered by separate insurance limits (regardless of whether they were actually covered by insurance) and many covered by separate policies, especially  vehicles and boats, etc. But what about the contents?

For personal use real estate, the IRS tells us that we do not allocate between land and structures and other improvements such as landscaping. The insurance policy will generally have a category for structure and one for appurtenant structures; these would be combined for real estate. Additionally, if there is additional coverage for specific improvements and features such as trees, this would also be combined with the rest of the structure and appurtenant structures coverage. Each vehicle would be listed individually as would boats and RV’s. That leaves contents. Here is where it gets interesting.

CONTENTS / PERSONAL PROPERTY LOSSES

Since the OWENS case established the rule for personal asset adjusted cost basis, the “Separate computations” rule creates additional computational restrictions for assets such as contents of a home. For each item lost it is necessary to compute the original cost basis, value before the event and the value after the event, item by item. The following table is an example of how this can be done. In the table below, by computing the loss item-by-item the loss is less than either of the two aggregate methods computed above.

Line	Descrip-										Loss
	Tion of			Value	Value		Condition		Limits		Before
	Item Damaged			Before	After		Afater		Of		Insurance
	or Destroyed		Cost	Event	Event		Event		Loss		Proceeds
1	Couch		2,500	1,600	1,400		Needs cleaning		Pre-event Value		200
2	Table		500	300	100		Scratched				200
3	Chair		375	275	0		Destroyed				275
4	Antique mirror		1,500	4,000	0		Destroyed		Cost		1,500
	1 - 4 Sub-total		4,875	6,175	1,500						2,175
5	Necklace		1,200	1,200	0		Destroyed		Cost		1,200
6	4 Men’s suits		2,800	600	0		Destroye		Pre-event Value		600
	5 and 6 Sub-total		4,000	1,800	0						1,800
	Total		8,875	7,975	1,500		Total Computed Loss:				3,975
	Gross Cost less post- event values				7,375
	Gross pre-event less post-event values				8,875

CONTENTS / PERSONAL PROPERTY GAINS

A gain is realized if the insurance proceeds received exceed the cost basis immediately before the event, without reduction for pre-event fair market value adjustments. Additional issues involve whether proceeds are received for property damage or other coverages or are covered by other Code sections such as grants and additional living expenses.

The insurance claim for the loss is processed, the tables below presents the results of an insurance claim and the gain / -loss realized as well as the affect of a partial reinvestment of proceeds. There is an item that is limited in coverage (* necklace) and in this example, the insurance company arbitrarily pays only 80% on the balance, claiming other sources could be accessed to acquire replacements. The taxpayers make purchases to reacquire some items, but they decided to do without the antique, the necklace and suits. Overall, the taxpayer has reinvested $7,200 of the $11,080 insurance proceeds. The net gain not reinvested is as computed on an item by item basis equal to $1,580, but the total proceeds not reinvested in similar items is $3,880 ($11,080 proceeds less $7,200 reinvested). The taxpayer has a net gain of $1,580.

Line		Replace-	Insurance	Insurance			Acquisition	Gain Not		Loss
		Ment	Limits	Proceeds		Gain	of Replace-	Rein-		Real-
		cost	Applied	80% *		-Loss	ments	vested		ized
1		3,700	3,700	2,960		460	5,700
2		700	700	560		60	700
3		600	600	480		105	800
4		4,000	4,000	3,200		1,700		1700
1 - 4 Sub-total		9,000	9,000	7,200		2,325	7,200
5		3,000	1,000	1,000	*	-200	0			-200
6		3,600	3,600	2,880		80	0	80
5 & 6 Sub-total		6,600	4,600	3,880		-120	0
		15,600	13,600	11,080		2,205	7,200	1,780		-200
	*	Maximum limit of coverage for jewelry							Net Gain
									$1,580

While there is a net gain of $1,580 applicable to the last three items not reinvested, that is not necessarily the gain that is reportable by the taxpayer. If the antique mirror that was not replaced is judged to be similar or related in service or use as the couch, table an chair, the taxpayer has reinvested the funds sufficient to avoid reporting any gain, deferring gain on items 1-4 of $2,325.

While these details may not be material in a small case, when the quantity and quality are great, the need to attend to the details will be important, the choices and analysis and resulting decisions could have significant impact on the possible reporable gain.

Once each area is computed, the Internal Revenue Code tells us that all gains and losses should be netted to arrive at a net gain or loss. But what about the above situation where the taxpayer reinvested some of the proceeds? The deferred gain is not part of the net reportable gain that would be netted against the losses.

Reporting the loss on Form 4684:

If the remaining two items are combined, the following is the reporting on the Form 4684, resulting in no loss.

				Necklace &
				4 Men’s
				suits
Cost Basis		2		$4,000
Insurance		3		3,880
Gain		4		-
Value before loss		5		1,800
Value after loss		6		0
Loss – (Economic) Line 5 less line 6		7		1,800
Economic loss – smaller of line 2 or line 7		8		1,800
Subtract line 2 from line 8, if zero or less, enter zero -LOSS		9		0

If the items are reportable separately, then there is a net loss of $120 before the $100 adjustment and the reduction of 10% of Adjusted Gross Income.

				Necklace	4 Men’s
					suits
Cost Basis		2		$1,200	$2,800
Insurance		3		1,000	2,880
Gain		4		-	80
Value before loss		5		1,200
Value after loss		6		0
Loss – (Economic) Line 5 less line 6		7		1,200
Economic loss– smaller of line 2 or line 7		8		1,200
Subtract line 2 from line 8, if zero or less, enter zero -LOSS		9		-200	80
Net Loss					-120

The correct reporting would depend on whether the necklace and the 4 men’s suits are of a type that should be combined or reported separately.  In this example, no assertion is made as to the proper method of combination or separation of these items for reporting purposes. The amounts and item descriptions are presented only for exposition purposes.

Another classification in an insurance policy that may apply is Scheduled Property. This is personal property that is itemized in the insurance policy with specific values attached to each item. These items are generally of a type that are high value and are supported by appraisals. In the case of a loss regardless of the fact that the fair market value may have increased since the appraisal, the insurance coverage is limited to the amount listed in the policy. If the antique mirror had been a scheduled property item, it could not be combined with the other three items; it would have to be itemized or combined with other similar scheduled property. The fact that one taxpayer has chosen to specifically insure, schedule, an item in their insurance policy does not mean that it is scheduled in another case where the taxpayer has an identical item that is not scheduled / itemized in the policy.

Finally, what about the small stuff? Some of it can add up to substantial amounts. Here is where insurance and tax diverge. As a taxpayer, the emphasis should be on collecting the maximum amount on the insurance policy. Categories to consider: linens, cloths, kitchen utensils, dishes, pots and pans are examples. To deal with these, make detailed lists, go to the store that you would have purchased the items, in general; get prices and that will be your replacement cost and your insurance claim. Next depreciate those values to consider the time period that you held the items and that will be your cost; then discount the amounts for the used condition at the time of the loss. On this last discount, the IRS would like you to use thrift store prices, but that is not realistic, since you did not actually find it appropriate to donate the items to a thrift store.

Additionally, some items of personal property of high value may require an appraisal. The determination of that aspect of the process is not a part of this analysis.

This blog, “AccountantForDisasterRecovery.com” has been addressing taxpayer income tax issues related to catastrophic losses for more than five years.

All rights to reproduce or quote any part of the chapter in any other publication are reserved by the author. Republication rights limited by the publisher of the book in which this chapter appears also apply.

	JOHN TRAPANI
	Certified Public Accountant
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	Thousand Oaks, CA 91362
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	It All Adds Up For You

This material was contributed by John Trapani. A Certified Public Accountant who has assisted taxpayers since 1976, in analyzing and reporting transactions of the type covered in this material.  

Internal Revenue Service Circular 230 Disclosure

This is a general discussion of tax law. The application of the law to specific facts may involve aspects that are not identical to the situations presented in this material. Relying on this material does not qualify as tax advice for purpose of mounting a defense of a tax position with the taxing authorities

The analysis of the tax consequences of any event is based on tax laws in effect at the time of the event.

This material was completed on the date of the posting

© 2013, John Trapani, CPA,