Salvage a Casualty Loss Deduction

It can be difficult to claim a casualty loss for damage or theft to personal property because the tax law limits the deduction in two ways:

  • You can't deduct the first $100 of any casualty.
  • You can only write off casualty losses when the total amount in one year (reduced by the $100 per casualty amount) exceeds 10 percent of your adjusted gross income (AGI).
Car crash - fender bender

However, there are no limits on losses for business property or income-producing property such as rental real estate. In other words, you can write off business losses without applying the 10 percent limit or the $100 per casualty amount applied to personal losses.

There's a way to salvage a business deduction when you have a car accident with a car used personally.

Suppose your spouse has an auto accident in your personal car on an icy road in February. If your annual AGI is $100,000 and the unreimbursed loss is $3,000, you get no deduction because of the 10 percent limit. However, if you normally use your car for business driving, you can salvage a casualty loss deduction.

Strategy: After you get the damaged car back from the repair shop, switch cars with your spouse and use it as a business vehicle. If your business use of your spouse's car then comes to, say, 80 percent of its total use, you can now deduct $2,400 (80 percent of $3,000) on your tax return.

It doesn't matter that you started using the car after the accident for business. You can still get a deduction by prorating the time the car is used for business purposes.

Be sure to document business driving use to back up your claims.

To get a casualty tax write-off, damage must be caused by a "sudden, unexpected or unusual" event such as a earthquake, hurricane, tornado, fire, flood or storm. Auto collisions and thefts can also qualify. (No deductions for damage caused by gradual deterioration, such as destruction caused by termites or a drought.)

To figure a deductible casualty loss, take your adjusted basis in the property and subtract any:

  • Salvage value, and
  • Insurance reimbursements you get or expect.

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