However, if property used in a trade or business or held for the production of income is totally destroyed by casualty, and if the fair market value of such property immediately before the casualty is less than the adjusted basis of such property, the amount of the adjusted basis of such property shall be treated as the amount of the loss for purposes of section 165(a).
Value of automobile immediately before casualty | $2,000 |
Less: Value of automobile immediately after casualty | 1,500 |
Value of property actually destroyed | 500 |
Loss to be taken into account for purposes of section 165(a): Lesser amount of property actually destroyed ($500) or adjusted basis of property ($3,600) | 500 |
Less: Insurance received | 300 |
Deduction allowable | 200 |
In 1958 A purchases land containing an office building for the lump sum of $90,000. The purchase price is allocated between the land ($18,000) and the building ($72,000) for purposes of determining basis. After the purchase A planted trees and ornamental shrubs on the grounds surrounding the building. In 1961 the land, building, trees, and shrubs are damaged by hurricane. At the time of the casualty the adjusted basis of the land is $18,000 and the adjusted basis of the building is $66,000. At that time the trees and shrubs have an adjusted basis of $1,200. The fair market value of the land and building immediately before the casualty is $18,000 and $70,000, respectively, and immediately after the casualty is $18,000 and $52,000, respectively. The fair market value of the trees and shrubs immediately before the casualty is $2,000 and immediately after the casualty is $400. In 1961 insurance of $5,000 is received to cover the loss to the building. A has no other gains or losses in 1961 subject to section 1231 and § 1.1231-1 . The amount of the deduction allowable under section 165(a) with respect to the building for the taxable year 1961 is $13,000, computed as follows:
Value of property immediately before casualty | $70,000 |
Less: Value of property immediately after casualty | 52,000 |
Value of property actually destroyed | 18,000 |
Less: Insurance received | 5,000 |
Loss to be taken into account for purposes of section 165(a): Lesser amount of property actually destroyed ($18,000) or adjusted basis of property ($66,000) | 18,000 |
Less: Insurance received | 5,000 |
Deduction allowable | 13,000 |
The amount of the deduction allowable under section 165(a) with respect to the trees and shrubs for the taxable year 1961 is $1,200, computed as follows:
Value of property immediately before casualty | $2,000 |
Less: Value of property immediately after casualty | $400 |
Value of property actually destroyed | 1,600 |
Loss to be taken into account for purposes of section 165(a): Lesser amount of property actually destroyed ($1,600) or adjusted basis of property ($1,200) | 1,200 |
Value of property immediately before casualty | $90,000 |
Less: Value of property immediately after casualty | 70,400 |
Value of property actually destroyed | 19,600 |
Loss to be taken into account for purposes of section 165(a): Lesser amount of property actually destroyed ($19,600) or adjusted basis of property ($91,200) | 19,600 |
Less: Insurance received | 5,000 |
Deduction allowable | 14,600 |
shall be limited to that portion of the loss which is in excess of $100. The nondeductibility of the first $100 of loss applies to a loss sustained after December 31, 1963, without regard to when the casualty occurred. Thus, if property not used in a trade or business or for income producing purposes is damaged or destroyed by a casualty which occurred prior to January 1, 1964, and loss resulting therefrom is sustained after December 31, 1963, the $100 limitation applies.
26 C.F.R. §1.165-7