Final answer:
The casualty 1) loss for a partially destroyed asset is the lesser of the decrease in fair market value or the adjusted cost basis of the asset before the incident, minus any insurance reimbursements.
Step-by-step explanation:
When an asset is only partially destroyed, the casualty loss can be calculated as the lesser of two amounts: the decrease in the fair market value of the asset as a result of the casualty, or the adjusted cost basis of the property before the casualty. It does not depend solely on the fair market value before the destruction, the cost basis of the asset, the insurance coverage on the asset, or the remaining value of the asset after the destruction. Specifically, the casualty loss is determined by taking the smaller of the decline in fair market value or the asset's cost basis and subtracting any insurance or other reimbursements received. If the cost basis is less than the decrease in fair market value, then the cost basis is used, less any insurance received. However, if no insurance compensation is involved, you would compare the adjusted basis to the decrease in fair market value directly.
To calculate a partial loss:
- Estimate the asset's fair market value both before and after the casualty.
- Calculate the difference to find the decrease in fair market value.
- Determine the asset's adjusted cost basis (the original cost minus depreciation).
- Subtract any insurance or other reimbursement received from the lesser of the two amounts calculated in steps 2 and 3.
The result of this calculation will be the deductible casualty loss. Remember that there may also be limitations and thresholds that apply when claiming a casualty loss on a tax return, depending on the tax laws and regulations in effect.