ExpertHard1 markMultiple Choice
CPA · Question 63 · Area IV: Individual Taxation
A taxpayer's home was destroyed by a federally declared disaster. The adjusted basis was $200,000. The FMV before the disaster was $300,000, and $0 after. Insurance paid $250,000. What is the deductible casualty loss (before AGI limitations)?
A taxpayer's home was destroyed by a federally declared disaster. The adjusted basis was $200,000. The FMV before the disaster was $300,000, and $0 after. Insurance paid $250,000. What is the deductible casualty loss (before AGI limitations)?
Answer options:
A.
$0
B.
$50,000
C.
$100,000
D.
$200,000
How to approach this question
Casualty Loss = Lesser of Decline in FMV or Basis, MINUS Insurance. If Insurance > Basis, it's a GAIN.
Full Answer
A.$0✓ Correct
The taxpayer received insurance proceeds ($250,000) that exceeded the adjusted basis ($200,000). This results in a casualty gain of $50,000, not a loss.
Common mistakes
Calculating loss based on FMV ($300k) minus Insurance ($250k) = $50k loss. You can't lose un-taxed appreciation.
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