Farmers and ranchers who have suffered losses due to fires, floods, earthquakes, hurricanes, tornadoes, storms, etc. may have deductible losses due to these events. The amount of the loss will depend upon whether it occurred to business or personal property and whether or not the loss was reimbursed by insurance or a government program.
In some instances, a taxable gain can occur when insurance or other proceeds are greater than the adjusted tax basis of the items. The following examples illustrate the rules that apply to casualty gains and losses for various pieces of personal and farm property, and how the gain or loss is determined for each item as well.
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A personal residence had damage from a tornado. The home was insured and $100,000 of insurance proceeds was received to repair the damage. The basis in the home at the time of damage was $75,000; therefore a casualty gain is realized of $25,000 ($100,000 insurance less the $75,000 basis). The $25,000 is personal casualty gain since the home does not qualify as business use property.
Flooding of cropland and pasture land damaged terraces. A measure of the damage to the cropland is the cost of restoring it to the condition prior to the casualty. Assume that the land has a cost basis of $250,000 and the cost of restoring flood-damaged acres is $50,000. The allowed loss will be the lesser of the $50,000 decrease in value or the $250,000 cost basis. If any insurance proceeds were received to compensate for the damage, the $50,000 deductible loss would be reduced by that payment.
A storage shed with a tax basis of $15,000 was completely destroyed. It was not insured. The amount of the loss is the tax basis of $15,000. In addition, the barn was also damaged. The cost of repairing the barn to its condition prior to the damage was $40,000. The barn was insured, but the proceeds were only $30,000, so the amount of the casualty loss is $10,000 ($40,000 of repairs less the $30,000 of insurance proceeds).
A tractor and a planter that were both fully depreciated (a zero tax basis) were completely destroyed. Neither was insured. Since the adjusted tax basis was zero for both assets, there is no loss allowed.
Three market steers were killed by lightning. The cost of the animals and the costs of raising them are deducted on Schedule F. Therefore, there is not a deductible casualty loss for the steers. In addition to the loss of the steers, a purchased herd bull was killed. The bull was purchased for $3,000 and the adjusted tax basis was $1,000. The allowed casualty loss on the bull is $2,000. Flooding caused three raised cows to drown. Since these cows were raised, their tax basis was zero, and therefore no casualty loss is allowed for them.
Once all the gains and losses for the business assets are determined, they are netted to determine the amount of the net casualty gain or loss that will be reported on the income tax return.
This is only a brief discussion of the tax rules that apply to business casualty losses. Please consult your tax preparer or advisor for additional information concerning these and other tax provisions that are specific to your individual and business situation.