Casualty and Theft Events

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Sometimes a perceived loss is turned into taxable income by the tax code.

The owing of tax because of a fire is not easily understood and is usually very distasteful to nearly everyone. A brief explanation is given to in the following paragraph.

I shall quote an excerpt from an Internal Revenue Service Publication:

"Gain from casualty or theft. When you have a casualty to, or theft of, your property and you receive money, including insurance, that is more than your adjusted basis in the property, you generally must report the gain. However, under certain circumstances, you may defer the payment of tax by choosing to postpone reporting the gain. To do this, you must generally buy replacement property within 2 years after the close of the tax year in which any part of your gain is realized. The cost of the replacement property must be equal to or more than the net insurance or other payment you received. For more information about casualty gains and losses to business and income producing property, see Publication 547.

How to report. If you had a casualty or theft that involved property used in your rental activity, you figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. Also you may have to report the net gain or loss from Form 4684, on Form 4797, Sales of Business Property. (Follow the instructions for Form 4684.)"

Citation: Publication 527 – "Residential Rental Property, Casualties and Thefts"