J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

18.15 Repairs May Be a “Measure of Loss”

The cost of repairs may be treated as evidence of the loss of value (Step 1 (18.13)), if the amount is not excessive and the repairs do nothing more than restore the property to its condition before the casualty. An estimate for repairs will not suffice; only actual repairs may be used as a measure of loss. However, where you measure your loss by comparing appraisals of value for before and after the casualty, repairs may be considered in arriving at a post-casualty value even though no actual repairs are made.

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Planning Reminder

Keep Records of Deductible Losses

If your property is damaged, you must reduce the basis of the damaged property by the casualty loss deduction and compensation received for the loss (5.20). When you later sell the property, gain or loss is the difference between the selling price and the reduced basis.

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Deduction not limited to repairs.

A casualty loss deduction is not limited to repair expenses where the decline in market value is greater, according to a federal appeals court; see the following Example.

EXAMPLE

Connor claimed that the market value of his house dropped $93,000 after it was damaged by fire. His $52,000 cash outlay in repairing the house was reimbursed by insurance. He claimed a casualty loss of approximately $40,000, the uncompensated drop in market ...