Question

A flood (federally declared disaster) destroyed an antique Persian rug owned by Mr and Mrs McConnell. The couple purchased the rug for $13,000 fifteen years ago, but its appraised FMV before the flood was $42,500. Unfortunately their homeowners' insurance policy does not cover flood damage. Compute the McConnells' casualty loss (before the 10% AGI threshold).
$42,500
$13,000
$42,400
$12,900

Answer 1

The Mc Connells' casualty loss (before the 10% AGI threshold) is $13,000. (Option B)

How do you compute the Mc Connells' casualty loss?

The FMV of the rug before the flood or its cost basis (i.e., the amount the Mc Connells paid for it) should be subtracted from the FMV of the rug after the flood to determine the Mc Connells' casualty loss.

The lesser of the FMV before to the flood or the cost base would be the casualty loss if the FMV of the rug after the flood is zero (as it appears to be in this case since it was destroyed). The casualty loss in this instance is $13,000 because the cost basis is $13,000 and the FMV prior to the flood was $42,500. The right response is therefore $13,000.

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Answer 2

The casualty loss for the Mc Connells (before the 10% AGI level) is $13,000. Hence, the correct option is (b.) $13,000.

How should the Mc Connells' casualty loss be calculated?

To calculate the Mc Connells' casualty loss, deduct the FMV of the rug before the flood or its cost basis (the amount the Mc Connells paid for it) from the FMV of the rug after the flood.

If the FMV of the rug before the flood is zero, the casualty loss is the lesser of the FMV before the flood or the cost base (as it appears to be in this case since it was destroyed). In this case, the casualty loss is $13,000 since the cost basis is $13,000 and the FMV previous to the flood was $42,500. As a result, the correct response is $13,000.

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