Casualty loss on rental home from theft ... no insurance reimbursement

[Rexlan]

The property is in Virginia.

I had a 4 bed brick home I bought from HUD and did extensive repairs. The pre-repair appraisal that was done for HUD was $80,000.

I paid $28,000 for the home and did $17,000 in repairs. My claimed basis was $45,000 and depreciation for one year figured on that amount.

I moved out of area and the insurance canceled since the property was vacant. I was trying to rent it.

In May of 2013 the property was broken into, wiring all cut out, ceilings ripped out in the basement and the plumbing (copper) cut out. The property was essentially destroyed ... no insurance. A police report was filed and is on record.

I had the property cleaned up, some wiring repaired and advertised it for public auction. It was sold for $40,000.

I am retired fixed low income. I decided to take the casualty loss but it does not seem to make sense to me. I reclaimed the depreciation and then took the lesser of the before FMV and adjusted my basis per IRS.

The net result seems to be that after deducting the after casualty FMV from the original per the appraisal ($40,000 form 4797) I had a adjust my basis due to the sale and add back the $40,000 sale as a capital gain (schedule D) so I ended up with a capital gain of $ $40,000 (schedule D) and a casualty loss of $40,000 (form 4797).

This now triggers a capital gain of $6,000 (15% x $40,000).

Can this possibly be correct? If it is I don't understand the point in even having the casualty loss provisions. Hopefully I am doing something wrong.


Thanks for helping me understand this.

 

[davew128]

The casualty loss treatment was incorrect begin with. Casaulty loss refers to loss due to theft, vandalism, or natural disaster and the property is destroyed. While you had vandalism, it was DAMAGED not destroyed. Your home wasn't gone. What you SHOULD have done is DEDUCT THE REPAIR COST. Your sale should have resulted in a small loss not a huge gain.

 

[Rexlan]

The casualty loss treatment was incorrect begin with. Casaulty loss refers to loss due to theft, vandalism, or natural disaster and the property is destroyed. While you had vandalism, it was DAMAGED not destroyed. Your home wasn't gone. What you SHOULD have done is DEDUCT THE REPAIR COST. Your sale should have resulted in a small loss not a huge gain.

Thanks for the reply but that just does not seem reasonable to me.

The vandalism made the home unfit to live in. It had a FMV of $80K (actually about $100 but only appraised at 80) before that and $40K after that (public auction).

 

[LdiJ]

Thanks for the reply but that just does not seem reasonable to me.

The vandalism made the home unfit to live in. It had a FMV of $80K (actually about $100 but only appraised at 80) before that and $40K after that (public auction).

I too have some doubts about the casualty loss.

I do however think that you had a capital loss.

Original investment in the property 45k plus the repairs that you made. For the sake of argument lets say those were 5k, so, 50k basis.

50k minus 40k sales proceeds, minus selling costs, plus depreciation recapture = net capital loss.

Taking a casualty loss would be double dipping since your basis was NOT 80k. That is why taking the casualty loss results in a capital gain, because its designed to prevent double dipping.

 

[Rexlan]

Thank you.

The IRS stuff is so damn complicated and I spent days on it.

The regs said the casualty loss is the difference between the before and after FMV. In this case that is $40,000. It goes on to further say that I had to adjust my original basis and add back the $40K sale price.

So on the 1040 form there is a 40K casualty loss and a 40K capital gain. The is a wash, HOWEVER, not really because the capital gain triggers a $6K capital gains tax.

To me this boils down to I had an $80K property and it was destroyed. I salvaged $40K (which is close to the investment) and have to pay the government $6K for the pleasure of losing $40K .... illogical.

It may be easier to just ignore the whole thing and forget the capital loss all together .... IRS seems do do this stuff deliberately.

 

[tranquility]

I have my doubts along with the others this is a casualty loss. It may not meet the "sudden" test as well as some concerns the others may have. (Such as destroyed.) Just take the capital loss and be done.

 

[Rexlan]

Hi Tranquility ... good to see you are still around. I have been absent from the forum for several years.

Well it was quite sudden ... they busted down the basement door at night, taped off the 3 windows and then took a sawsall and cut all the plumbing out and all of the wiring right back to the meter. Tore out the air conditioner lines (copper) and ripped down all of the ceiling (1900 sq. ft of it) to pull the wiring out. Best guess estimate I got was $45,000 to repair/patch it up.

Not sure what to do now as the tax will kill me.

Thanks all for the help and information

 

[LdiJ]

Hi Tranquility ... good to see you are still around. I have been absent from the forum for several years.

Well it was quite sudden ... they busted down the basement door at night, taped off the 3 windows and then took a sawsall and cut all the plumbing out and all of the wiring right back to the meter. Tore out the air conditioner lines (copper) and ripped down all of the ceiling (1900 sq. ft of it) to pull the wiring out. Best guess estimate I got was $45,000 to repair/patch it up.

Not sure what to do now as the tax will kill me.

Thanks all for the help and information

Again, don't attempt to take a casualty loss...just take the capital loss. It won't be as big of a deduction, but it won't result in capital gains tax either.

 

[tranquility]

Again, don't attempt to take a casualty loss...just take the capital loss. It won't be as big of a deduction, but it won't result in capital gains tax either.

Because we are talking about a person:

I am retired fixed low income.

I'm thinking this is the best path. How much tax is being paid in any event? I think the easiest course is just report the sale and add the clean up to the basis or cost of the sale.

 

[LdiJ]

Because we are talking about a person:
I'm thinking this is the best path. How much tax is being paid in any event? I think the easiest course is just report the sale and add the clean up to the basis or cost of the sale.

Yep...the capital loss would likely be enough to wipe out any taxable income he had anyway.