Question

Seth had a car accident in 2018 in which his car was completely destroyed. At the time of the accident, the car had a fair market value of $30,000 and an adjusted basis of $40,000. Seth used the car 100 percent of the time for personal use. Seth received an insurance recovery of 80 percent of the value of the car at the time of the accident. If Seth's AGI for the year is $50,000, his deductible loss on the car would be:

a. $900.
b. $6,000.
c. $10,500.
d. $30,000.
e. None of these choices are correct.

Answer 1

Seth's deductible loss on the car would be $16,000, the adjusted basis of the car.

Step-by-step explanation:

The deductible loss on Seth's car would be the adjusted basis of the car minus the insurance recovery received. In this case, Seth's adjusted basis was $40,000 and he received an insurance recovery of 80% of the value of the car at the time of the accident, which is $24,000 ($30,000 * 80%).

So, the deductible loss would be $40,000 - $24,000 = $16,000.

However, the deductible loss is limited to the adjusted basis of the car, which is $40,000. Therefore, Seth's deductible loss on the car would be $16,000, the adjusted basis of the car.

Answer 2

The deductible loss on Seth's car would be $6,000. Option B is correct.

Step-by-step explanation:

Here's how we can calculate Seth's deductible loss:

1. Calculate the insurance recovery:

Insurance recovery = 80% * Fair market value = 80% * $30,000 = $24,000.

2. Calculate the casualty loss:

Casualty loss = Adjusted basis - Insurance recovery = $40,000 - $24,000 = $16,000.

3. Determine the allowable loss:

Since Seth used the car 100% for personal use, the allowable loss is equal to the casualty loss.

Allowable loss = Casualty loss = $16,000.

4. Compare the allowable loss to the fair market value:

Fair market value < Allowable loss ($30,000 < $16,000)

Therefore, the deductible loss is capped at the fair market value.

5. Deductible loss:

Deductible loss = Minimum of (Fair market value, Allowable loss) = Minimum of ($30,000, $16,000) = $6,000.

Therefore, Seth's deductible loss on the car is $6,000.

Explanation of incorrect answers:

• Option a. $900: This amount is too low and does not account for the fair market value of the car.
• Option c. $10,500: This amount is the difference between the fair market value and the adjusted basis, but it does not consider the insurance recovery.
• Option d. $30,000: This is the fair market value of the car, but the deductible loss is capped at this amount due to the personal use of the car.
• Option e. None of these choices are correct:** This is only correct if the answer cannot be determined from the information provided. However, based on the information given, we can calculate the deductible loss to be $6,000.

The correct answer is b. $6,000 (Option B).