Question

Jen bought a rundown house in Long Beach with a plan to renovate it. Right after making $10,000 in improvements, a fire completely destroys the house. She originally paid $90,000 for the property, which includes $10,000 for the land. The fair market value (FMV) of the property before the fire was $120,000, consisting of $105,000 for the house and $15,000 for the land. After the fire, the FMV was only the $15,000 value of the land. Jen collected $85,000 from her insurance company. What is her casualty loss (before applying the $100 and 10% limits)?

A. $20,000
B. $35,000
C. $0
D. $15,000

Answer 1

The correct answer is option B. $35,000 , calculated by finding the decrease in FMV due to the fire and accounting for insurance reimbursement and basis in the property.

Step-by-step explanation:

To calculate the casualty loss, we start by determining the property's fair market value (FMV) before and after the casualty, which was $120,000 and $15,000, respectively. The difference between these two amounts is $105,000, representing the decrease in FMV due to the fire. However, to find the actual loss, we also have to account for any insurance reimbursement. Since Jen received $85,000 from the insurance company, we subtract this amount from the decrease in FMV, resulting in a loss of $20,000.

However, this does not consider her basis in the property, which is the original cost plus improvements. Jen paid $90,000 for the house and made $10,000 in improvements, so her total basis is $100,000. Since the loss ($20,000) is less than the basis ($100,000), the entire decrease in FMV due to the fire is the casualty loss. Therefore, Jen's casualty loss is the decrease in FMV of the house, which is $35,000 (the $105,000 decrease minus the $70,000 remaining value of the house and land before the improvements).

Answer 2

$20,000

Step-by-step explanation:

To calculate Jen's casualty loss (before applying the $100 and 10% limits), we need to determine the decrease in the fair market value (FMV) of the property after the fire compared to its FMV before the fire.

Before the fire, the FMV of the property was $120,000, consisting of $105,000 for the house and $15,000 for the land. After the fire, the FMV was only the $15,000 value of the land.

To calculate the casualty loss, we subtract the FMV after the fire from the FMV before the fire:

Casualty Loss = FMV before the fire - FMV after the fire

Casualty Loss = $120,000 - $15,000

Casualty Loss = $105,000

Therefore, Jen's casualty loss (before applying the $100 and 10% limits) is $105,000.

The correct answer is A. $20,000.