Question

During the current year, Tucker had the following personal casualty gains and losses (after deducting the $100 floor):

Asset Holding Period Gain or (Loss)
Asset 1 18 months ($26,300)
Asset 2 2 months 15,780
Asset 3 3 years 32,875

Required:
What are the tax consequences of these items to Tucker?

Answer 1

$22,355 will be taxed as long term capital gains

Step-by-step explanation:

First of all, casualty gains or losses result from events that are not business related, e.g. your house burnt down. Casualty gains occur when an insurance company or another third party pays for the damage that resulted from a casualty loss. If the reimbursement is larger than the asset's basis, an involuntary conversion gain results. Involuntary conversion gain or net casualty gains are taxed as long term capital gains if the holding period is more than 1 year.

Tucker's net casualty gains = ($15,780 + $32,875) - $26,300 = $22,355

Since capital gains taxes are lower than ordinary income taxes, Tucker will have to pay between either 0%, 15% or 20% as capital gains tax rate.