Capital Loss?

[MargaretMort]

A friend asked me a question today and I told her I would get her a real answer by asking here.

She and her husband bought a house 30 or more years ago--it was not a new house then--and it was their personal residence. About 10 years ago they bought a newer house and moved into it. House #1 has sat empty since until this past fall when an enterprising young man started cooking meth there and told a homeless couple he owned the house and they could squat. A fire got started, the house burned nearly to the ground and the owners were contacted to clean up the mess. They spent around $6000 to do so.

She wondered if they had a loss they could take on their taxes. Off the top of my head--I was on the golf course at the time--I said no, the house was not income producing and I thought the $6000 would be added to the basis of the property when and if they sold it. Right or wrong?

I appreciate any and all help. Many thanks.

MM

[kcjenkins]

I agree, Margaret, they still own the land, so they really do not have a loss until they sell that. The cost of the cleanup would be added to their basis just as the cost of demolishing the old house would have.

[OldJack]

>>Right or wrong? <<

Wrong... they have a casualty loss deductible on 1040 Sch-A, probably more than $6,000.

Thats the problem with taking phone calls on the golf course.

[jainen]

>>no, the house was not income producing<<

In my opinion, a casualty loss can be claimed on any capital asset, even if it is not income-producing. The amount of deduction is limited to the lower of loss in FMV or adjusted basis.

For example, assume they paid $25,000 for the home and made another $25,000 in improvements over the years, and the FMV of the building was $125,000 before it was destroyed. In my opinion they could claim a casualty loss of $50,000 (reduced by insurance reimbursement, $100/$500 floor, and 10% of AGI). The demolition would then increase the basis back up to $6000.

[MargaretMort]

Why would they have a capital loss? The house was deteriorating and unlivable. The property is still there and still theirs. Actually, the property is, or will be if the economy ever turns around, a heck of a lot more valuable than when they originally bought it. MM

[kcjenkins]

The amount of deduction is limited to the lower of loss in FMV or adjusted basis.

For example, assume they paid $25,000 for the home and made another $25,000 in improvements over the years, and the FMV of the building was $125,000 before it was destroyed. In my opinion they could claim a casualty loss of $50,000 (reduced by insurance reimbursement, $100/$500 floor, and 10% of AGI). The demolition would then increase the basis back up to $6000.

Now who is ASSUMING, Jainen? This house was so bad that they did not sell it or rent it, so just left it sitting empty, but you are going to assume that it was worth $125K???? Oh yeah, you are also ASSUMING that there was insurance?

[jainen]

>>Now who is ASSUMING, Jainen?<<

Now be fair--I said, "For example." Anyone should expect the actual numbers to be different. For all we know, it may well be that the property is worth MORE without the building in the way, in which case obviously there was no loss of FMV. Similarly, if insurance reimbursement was zero, that's the actual number to use.

I was trying to suggest an alternative interpretation. If I had wanted to make assumptions, they would be that the owners themselves set up the "enterprising young man" for a share of the profits, then tried to collect insurance on an unsaleable property, and finally wanted a tax deduction too!

[kcjenkins]

:lol: :)

[OldJack]

>>The house was deteriorating and unlivable.<<

Did you value the house and property? Have you even seen the property? They obviously had a loss as the house is no longer there and in whatever condition there would be some value if nothing but scrap. The question of fact is do they have a casualty loss as allowed by the code? It is your job to find out the facts and calculate if there is a deduction. Not just assume as KC has in this post.

[MargaretMort]

Actually, I am only looking into it as a favor to a friend--I do not do their taxes. I have seen the property but not the house. My guess would be they maybe paid $12000 to $15000 when they bought it. Did they still carry any kind of insurance? Probably not. Was there an insurance pay-out? Probably not. I will ask a couple of more questions because I don't want to give them wrong advice but my strong feeling is that they did not suffer a deductible loss.

Thanks for all the responses. MM

[OldJack]

>>I don't want to give them wrong advice <<

You should not be giving free complicated tax advice even to a friend.

[jasdlm]

I still don't understand why there wouldn't be a casualty loss.

[BulldogTom]

I think there is a casualty loss. The condition of the property only matters as to FMV (as jainen pointed out). What has not been mentioned is the allocation between the land and home. The land is not damaged, and there is no loss there. The home has been destroyed by fire, which is one of the definitions of a casualty. There is more in the code about unforseeable and sudden in nature, but ASSUMING that those conditions are met, the lower of the FMV or adjusted basis of the home is the starting point for the calculation. If the home had a FMV of zero, then there is no loss, even though there is a casualty.

ASSUMING the original purchase price of the home and land was 20K, and 10K was allocated to land, then the adjusted basis of the home is 10K (ASSUMING no other improvements, periods of depreciable use, etc). ASSUMING the FMV of the home just before the fire is 10K, and the FMV after the fire is 0, then the casualty loss is 10K. Then you take the haircut (is it still $100?), the 10% of agi haircut, and what is left is the deductible casualty loss.

The 6K to clean up the LAND after the casualty would be added to the basis of the land, in my opinion.

Tom

Lodi,CA

[jainen]

>>wondered if they had a loss they could take on their taxes<<

Definitely--contact the county assessor for an immediate adjustment.