Confused about Casualty Loss and Depreciable Asset

[Stupidasur3]

How do I handle Casualty Losses on items that are on my Depreciation Report?  I've entered the Casualty loss of the A/C Unit in the Casualty Loss section of TurboTax, but how do I get this removed off of the Depreciation Report?  If I enter this in both places, won't it double-book the loss on Form 4797?

[WendyN2]

Report casualty and theft losses on IRS Form 4684 Casualties and Thefts PDF. ("Business" - Business Income" - "Business Assets"   "Tell us more about this asset"  -  and select "This item was sold, retired, stolen, destroyed...." Enter the date, then "Continue" and select "Yes" at the next screen as it was destroyed due to casualty (one of the stipulations of selecting "Yes").   

Use Section A for personal-use property and Section B for business or income-producing property. For losses involving business-use property, refer to IRS Publication 584 - Business Casualty Losses 

[Stupidasur3]

This doesn't answer my question.  How do I get the item to stop depreciating on my depreciation report?  

[ThomasM125]

You have to indicate that the asset was removed from service in the business section of your return to stop the depreciation on it.

A casualty loss is intended to allow you to deduct a loss on a personal asset. The destruction of a business asset is allowed whether or not it came about from a casualty. So, you should remove the casualty loss that you entered and find the asset entry in the business section of your return and indicate that it was removed from service.

You will be asked to enter the sales amount (insurance proceeds) associated with the disposition, and the difference between that and the adjusted basis of the asset (cost less depreciation) will give you a deductible loss or taxable gain.

[Mike9241]

This doesn't work if the activity is rental.  it can become part of the PAL which might not be allowed 

the taxpayer needs to tell us the activity or business in which the asset was used. it could be a passive activity or a business activity. in this regard, I disagree with Tax Experts since there can be business casualty losses reportable in section B of form 4684. however, TurboTax is not sophisticated enough to handle this loss that way - carry the info to the 4684 and not continue to depreciate the asset.  so if a trade or business I would follow Tax Experts advice just indicate it's sold. 

on the other hand, if it is rental or other passive activity the method suggested doesn't work the loss would become part of the passive loss subject to the passive loss limits. so what I would do is indicate that it was disposed of on whatever date the casualty occurred.  depreciation would calculate for the year.  for sales price enter the net tax basis. thus there would be no gain or loss on it. the 4797 should show this.  then on the 4684 section B I would enter the information requeste. forr cost or basis use the net tax basis 

[Stupidasur3]

Ok, help me out here.

First off, I do materially participate, and fit all the requirements to classify my business as a "Business", no passive loss activity,  I have a Mobile Home Park with 30+ spaces and own 10 of the homes.  This is my primary source of income.  I also own a rental house that doesn't fit the "750 hour" rule, but I consider my business to be "Rental Properties" in a professional manner.  All properties, including my main home suffered damages from Hurricane Sally.  With that said, as an example:

I have one mobile home that will require a roof to be replaced.  On my asset summary, I have a Metal Roof-Lot #2, original Cost $2000.00, prior depreciation $660.  If I'm understanding everything correctly, I go to the Asset Summary in TT, select this asset, walk through until it asks me if I disposed, select yes, enter Disposal date as date of Hurricane (9/16/20).  It then ask for special handling.  If I select "Yes" there, it then takes me back to the Asset Summary page so I can add another asset.  Where do I go from here?  Do I now take the remaining depreciation and enter that into the Casualty Losses area of TurboTax?

[DianeW777]

Answer Yes to the Special Handling question. A casualty in business can result in a gain or a loss depending on insurance proceeds.  The transaction is treated like a sale whether or not you receive an insurance reimbursement. If there is no insurance, the remaining cost basis will be a loss against other income.

With your TurboTax return open use the steps below to complete your entry.  Steps do not vary between TurboTax versions.

1. You will record the necessary information in the rental asset(s) involved in the casualty. You will enter the disposition date as you indicated in the asset under the rental activity. 
2. Correct the prior depreciation if necessary (uncommon if TurboTax was used since it was placed in service. The depreciation will be a partial year since it was removed from service.
3. When the question comes for special handling you will answer 'Yes'; because it was lost, damaged or stolen.
4. Continue to through the rental activities until you arrive back to the Wages and Income screen.
5. Next, select the Deductions and Credits section, scroll to Other Deductions and Credits (Show more if necessary)
6. Select Disasters, theft, and other property loss or damage > Start / Revisit
7. Answer 'Yes' you had something damaged > Enter your description (Hurricane), date and select Income-Producing Property (e.g. Business property, Investment property) > Continue 
8. Select 'No' it was not used in a passive activity (based on your statement of material participation)
9. Enter the description of the asset  and other requested information (cost basis will be the original cost less depreciation), enter insurance reimbursement if applicable.
10. Be prepared for the fair market value (FMV) at the time of the loss (can be the remaining cost basis) and the value after which may be zero (you must make this determination).
11. Continue to complete the casualty information until you are back at the main Deductions and Credits screen.
12. You can view your forms by using Forms in TurboTax Desktop or before filing but after payment in TurboTax Online.(Form 4684, 4797)
13. See the images below

[Stupidasur3]

Ok, this has been my approach so far.  Taking for example the mobile home roof that was only partially destroyed, with an original cost of $2000, $660 depreciated to date.  I am leaving this on my depreciation report as still in service.  I am not claiming it as destroyed and removed from service on the date of the Hurricane, so no changes to it.  But I am taking as a Casualty Loss the estimated cost to repair the roof, so I'm going into the Casualty Losses section of TurboTax and entering a Casualty Loss for the amount of the estimate, currently $1576.00, with a date acquired as being the date of the Hurricane (even though repairs haven't been made yet), the cost basis is my estimate, insurance reimbursement -0-, since there was none, FMV before loss $1576.00 (estimate to repair), FMV after loss -0-.  From reading what the TCJA allows, I should be able to use my estimates as a method of computing Casualty Losses.  Do this sound wacky?  Will this work?  Through an audit?  Don't know.

[ReneeM7122]

The computation for a casualty loss is complex.  The IRS will take into consideration both the estimate as well as the actual cost.  So if you got a smaller estimate, they could come and ask you for the real cost to repair.  

Please see this IRS Q&A about casualty losses.

@Stupidasur3

[fusiondoc2]

how do I enter a partial asset disposition from a casualty loss (roof lost in hailstorm) on a rental home I own? asset entry form does not seem to allow partial dispositions only complete disposition. I need to reduce basis of rental but only by adjusted value of lost roof

[fusiondoc2]

To clarify, the hailstorm destroyed roof was the original roof from the 2005 rental home purchase, so I need to remove the portion of the adjusted basis for the destroyed roof only and the basis for the rest of the home should continue to be depreciated over the 13 years left from the original 27.5 year depreciation schedule. I have already calculated the basis of the destroyed roof using a partial asset disposition calculator from the KBKG website. My problem is how to do the entries on TT for a partial asset disposition to get the future depreciation correct.

[AmyC]

@fusiondoc2  You will need to add the house again using the new basis for current and future depreciation. Keep the dates the same. You will need to keep track of the prior depreciation in your financial notebook. Delete the old house asset after getting the new one in place.

Add the roof as a new asset.

See Publication 527, Residential Rental Property (Including Rental of Vacation Homes), in particular, restoration.

I want to urge you to create a financial notebook that is kept separate from your tax return. Keep it safe and each year, add your year-end statements from all your financial accounts plus a copy of your W2’s, your schedule E carryover information, and proof of your basis in your various investments. You must keep tax records related to a rental house from the time you purchase until you sell plus 3 years. It is very easy to lose track of disallowed losses, prior depreciation, etc.

[fusiondoc2]

Thank you very much for your help.

Does TT have any plans to modify the software to allow partial asset dispositions without the need to keep separate written records for the prior basis? For example, one solution  would have been to enter a new asset entry with a negative basis asset for the old replaced roof and override the remaining asset life on this negative value asset to the remaining 13 years. ....but TT wouldn't allow me to enter negative value new assets.

I'm surprised that this partial asset disposition is not a very common problem.  Especially since  2014, the IRS allows choosing  partial asset dispositions even when casualty losses or insurance payments are not involved.

[DaveF1006]

This is true but i am not certain that the IRS would accept negative value assets either. Remember, the IRS is not a progressive organization and they have been doing the same things for years. 

[fusiondoc2]

TT should determine a better solution to partial asset distributions using your software. The solution AmyC suggests has the problem that the depreciation correction is wrong in tax year of the disposition. By not changing the dates on the original house purchase asset entry form but only lowering the old basis to remove the basis of the replaced roof, it will incorrectly calculate the depreciation to be 12 months at the new lower basis rather than the correct  answer which is part of the year at the old basis and the remainder of the year (after the date of the partial disposition) at the new lowered basis.