Disaster Casualty Cost Basis?

[NomeMan]

My house was damaged by a glacial flood this past summer.  It was a federally declared disaster and I have the FEMA number already entered.  I am desperately trying to figure out what the "cost basis" means for my casualty deduction.  I had some damage to my home for which I was partially reimbursed by a state assistance program.  The IRS form (547) referenced in TurboTax is absolutely no help whatsoever.  Is my cost basis just what I paid for my house originally?  And then subtracting out the state assistance payment?

That doesn't make much sense honestly because it results in kind of a ridiculously large tax refund.  Admittedly, the FMV of my house is down by about $50K, but I am not at all sure that accounts for the change.  

[MindyB]

The cost basis of the loss is the decrease in basis from the casualty event, and subtract the state assistance.  You can deduct the fair market value decrease of your home due to the flood.  You must also reduce the loss by insurance payments, and you must have already applied for any available insurance reimbursement.  

The fair market value before the casualty or loss equals what the house would have sold for immediately before the flood. The fair market value after the casualty is what the house or item would have sold for on the market after the flood. 

For more information,  see IRS Publication 547 and also What if I have property that was lost or damaged (a casualty loss)?

[NomeMan]

OK.  I want to make sure I understand correctly.  

If my home and property suffered $12,000 in damages from the flood that would be the "Cost Basis"?  I would enter that on the appropriate line in TT and then on the next line enter any reimbursement I received from insurance or state assistance or FEMA, correct?  The next screen in TT asks me for the FMV of the house prior to the flood and then the FMV of it immediately after the flood.  I have those numbers.  

IRS publication 547 is not at all helpful.  

[DawnC]

If you had $12K in damages - the FMV would have decreased by $12k from the FMV before the incident.   Example- your house has a FMV of $100k before the storm - the FMV after the storm would be $$88k.   That establishes your $12k casualty loss.   Then if you received any reimbursement, those would reduce your loss.   

[NomeMan]

I am more concerned with how to determine the cost basis. There’s nothing that I can find that simply explains how to calculate that. 

[IsabellaG]

The IRS says that if your property isn't completely destroyed, your casualty loss amount is the lesser of your adjusted basis in the property or the reduction in fair market value of the property.

 So for cost basis, you would use the cost basis of the entire property. and for the reduction in FMV you would use the $12K in damages, as DawnC explained. You don't have to figure the cost basis for the parts of the home that were damaged. 

[NomeMan]

OK.  So my original question still stands.  How do I calculate the cost basis for my property?

The IRS form 547 is not at all helpful in making the calculation as it only references things that are a total loss to theft or damage.  There are no examples in that document that I can find about how to calculate the cost basis of real property that TT is asking for.  

[AmyC · Accepted solution]

Cost basis is how much you paid plus improvements over time. See Basis in real property.

You may have paid $150,000 for your house, added a roof and a deck  for another $30,000. Your basis would be $180,000. Plants, fences, sheds and improvements to the house, all add to your basis.

[NomeMan]

Thank you, that makes sense. Not sure why the IRS can’t just say that. 

Is the FMV the decrease due to damages?  Because TT’s guidance says the drop in FMV should be based on an appraisal just before and just after the event. That makes a huge difference in my calculations. Damage was like $15,000 but the appraisal drop was more like $40,000. 

[AmyC]

Yes, the casualty loss is the lower of basis or change in FMV. Let me give you,  Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). to make sure your full basis is covered.

Reference: Topic 515 - full of great information.