Publication 547 - Casualties,disasters,and Thefts

property damaged as a result of a casualty are

take that money into consideration in computing

Example. As a result of a fire, you vacated

not a part of the loss. They are expenses in

the casualty loss deduction. Take into consider-

your apartment for a month and moved to a

determining your tax liability. You can claim

ation only the amount you used to replace your

motel. You normally pay $525 a month for rent.

these costs as a miscellaneous itemized deduc-

destroyed or damaged property.

None was charged for the month the apartment

tion subject to the 2%-of-adjusted-gross-income

was vacated. Your motel rent for this month was

limit on Schedule A (Form 1040).

Example. Your home was extensively dam-

$1,200. You normally pay $200 a month for

aged by a tornado. Your loss after reimburse-

food. Your food expenses for the month you

Adjusted Basis

ment from your insurance company was

lived in the motel were $400. You received

$10,000. Your employer set up a disaster relief

$1,100 from your insurance company to cover

fund for its employees. Employees receiving

your living expenses. You determine the pay-

The measure of your investment in the property

money from the fund had to use it to rehabilitate

ment you must include in income as follows.

you own is its basis. For property you buy, your

or replace their damaged or destroyed property.

basis is usually its cost to you. For property you

1) Insurance payment for living

You received $4,000 from the fund and spent

acquire in some other way, such as inheriting it,

expenses . . . . . . . . . . . . . . . . . . $1,100

the entire amount on repairs to your home. In

receiving it as a gift, or getting it in a nontaxable

2) Actual expenses during the

figuring your casualty loss, you must reduce

exchange, you must figure your basis in another

month you are unable to use

your unreimbursed loss ($10,000) by the $4,000

way, as explained in Publication 551.

your home because of the fire $1,600

you received from your employer’s fund. Your

3) Normal living expenses . . . .

725

Adjustments to basis.

While you own the

casualty loss before applying the deduction lim-

4) Temporary increase in

property, various events may take place that

its (discussed later) is $6,000.

living expenses: Subtract line 3

change your basis. Some events, such as addi-

from line 2 . . . . . . . . . . . . . . . . . .

875

tions or permanent improvements to the prop-

Cash gifts. If you receive excludable cash

5) Amount of payment includible in

erty, increase basis. Others, such as earlier

gifts as a disaster victim and there are no limits

income: Subtract line 4 from line 1 . .

$225

casualty losses and depreciation deductions,

on how you can use the money, you do not

decrease basis. When you add the increases to

reduce your casualty loss by these excludable

Tax year of inclusion. You include the tax-

the basis and subtract the decreases from the

cash gifts. This applies even if you use the

able part of the insurance payment in income for

basis, the result is your adjusted basis. See

money to pay for repairs to property damaged in

the year you regain the use of your main home

Publication 551 for more information on figuring

the disaster.

or, if later, for the year you receive the taxable

the basis of your property.

part of the insurance payment.

Example. Your home was damaged by a

Insurance and

hurricane. Relatives and neighbors made cash

Example. Your main home was destroyed

gifts to you that were excludable from your in-

Other Reimbursements

by a tornado in August 2000. You regained use

come. You used part of the cash gifts to pay for

of your home in November 2001. The insurance

repairs to your home. There were no limits or

If you receive an insurance or other type of

payments you received in 2000 and 2001 were

restrictions on how you could use the cash gifts.

reimbursement, you must subtract the reim-

$1,500 more than the temporary increase in

It was an excludable gift, so the money you

bursement when you figure your loss. You do

your living expenses during those years. You

received and used to pay for repairs to your

not have a casualty or theft loss to the extent you

include this amount in income on your 2001

home does not reduce your casualty loss on the

are reimbursed.

Form 1040. If, in 2002, you receive further pay-

damaged home.

If you expect to be reimbursed for part or all

ments to cover the living expenses you had in

of your loss, you must subtract the expected

2000 and 2001, you must include those pay-

Insurance payments for living expenses.

reimbursement when you figure your loss. You

ments in income on your 2002 Form 1040.

You do not reduce your casualty loss by insur-

must reduce your loss even if you do not receive

ance payments you receive to cover living ex-

Disaster relief. Food, medical supplies, and

payment until a later tax year. See Reimburse-

penses in either of the following situations.

other forms of assistance you receive do not

ment Received After Deducting Loss, later.

•

reduce your casualty loss, unless they are

You lose the use of your main home be-

Failure to file a claim for reimbursement. If

replacements for lost or destroyed property.

cause of a casualty.

your property is covered by insurance, you must

They also are not taxable income to you.

•

file a timely insurance claim for reimbursement

Government authorities do not allow you

Disaster unemployment assistance pay-

of your loss. Otherwise, you cannot deduct this

access to your main home because of a

ments are unemployment benefits that are taxa-

loss as a casualty or theft.

casualty or threat of one.

ble.

The portion of the loss usually not covered by

Qualified disaster relief payments you

insurance (for example, a deductible) is not sub-

Inclusion in income. If these insurance

TIP

receive in tax years ending after Sep-

ject to this rule.

payments are more than the temporary increase

tember 10, 2001, for expenses you in-

in your living expenses, you must include the

curred as a result of a Presidentially declared

Example. You have a car insurance policy

excess in your income. Report this amount on

disaster, are not taxable income to you. For

with a $500 deductible. Because your insurance

line 21 of Form 1040.

information on qualified disaster relief pay-

did not cover the first $500 of an auto collision,

A temporary increase in your living expenses

ments, see Qualified disaster relief payments

the $500 would be deductible (subject to the

is the difference between the actual living ex-

under Disaster Area Losses, later.

$100 and 10% rules, discussed later). This is

penses you and your family incurred during the

true, even if you do not file an insurance claim,

period you could not use your home and your

because your insurance policy would never

normal living expenses for that period. Actual

Reimbursement Received After

have reimbursed you for the deductible.

living expenses are the reasonable and neces-

Deducting Loss

sary expenses incurred because of the loss of

your main home. Generally, these expenses in-

Types of Reimbursements

If you figured your casualty or theft loss using

clude the amounts you pay for the following.

the amount of your expected reimbursement,

•

The most common type of reimbursement is an

Renting suitable housing.

you may have to adjust your tax return for the tax

insurance payment for your stolen or damaged

year in which you get your actual reimburse-

•

Transportation.

property. Other types of reimbursements are

ment. This section explains the adjustment you

•

discussed next. Also see the Instructions for

Food.

may have to make.

Form 4684.

•

Utilities.

Actual reimbursement less than expected.

Employer’s emergency disaster fund. If you

If you later receive less reimbursement than you

•

Miscellaneous services.

receive money from your employer’s emergency

expected, include that difference as a loss with

disaster fund and you must use that money to

Normal living expenses consist of these same

your other losses (if any) on your return for the

rehabilitate or replace property on which you are

expenses that you would have incurred but did

year in which you can reasonably expect no

claiming a casualty loss deduction, you must

not because of the casualty or the threat of one.

more reimbursement.

Page 5

Publication 547 - Casualties,disasters,and Thefts - 2002 Page 5

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