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House fire and casualty loss


cpabsd

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                Client’s mom died in a house fire in August 2017.  The house was insured.  My client received the insurance proceeds for the property and the contents of the house.  Due to insurance limitations, the amount received was not what the house/contents were worth before the fire.  The insurance agent gave tax advice ( ugh) to be sure to take the casualty loss for the difference.  How would I calculate the casualty loss?  At what point did my client inherit the house? I know in normal circumstances, it’s the value before the casualty loss minus insurance proceeds.  How does the death complicate or change this calculation?  Does stepped up basis impact anything in this scenario?  I believe any casualty loss would be the son’s rather than mom’s.  Mom died during the fire not later as a result of the fire.  She was trapped in the burning house. 

             Any citations would be most helpful as well.  

Thanks!!!

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What a sad situation for your client.  I don't think he inherited a casualty loss.  He inherited a burned out house and the insurance proceeds.  An appraiser should value the house and land to establish FMV.  The insurance is just a cash nontaxable inheritance. (Mom held the insurance and it should have gone to her, but son inherited it.)

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I agree with Sara.  My reasoning is that I don't believe that a child has an insurable interest in the parent's house, and I also believe that the insurance proceeds should have been paid to the estate. When a parent dies the insurance coverage dies with him or her, and the estate or beneficiary must obtain new coverage. Even if formal accounts aren't set up in the name of the estate, an estate still exists and must be dealt with. In this case, it sounds like the insurance was paid directly to the child bypassing the estate account, but I believe this should be treated as an inheritance of the funds.  Along that line of reasoning, I feel that the child can not claim any casualty loss; that would also be for the estate to deal with.

I've never dealt with this issue in my practice. Maybe others here have and will answer with something different.

 

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