Is this tax deductible?

[BOB W]

Per 2006 Pub 17: Among other records for proof of loss - "That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage." Same language in Pub. 547.

In other words, ownership is not required if there is contractual liability with leased property.

OK> what about tax basis wording? Is that only for owners? If you lease tax basis doesn't apply?

[Bees Knees]

OK> what about tax basis wording? Is that only for owners? If you lease tax basis doesn't apply?

The word lease does not appear in the code or regs for casualty loss. I wonder who made up that rule? Even in pub 547 where it talks about lease, just a few paragraphs prior to that it says the deduction is the lesser of basis or reduction in FMV. How do you get basis in a lease?

[erchess]

Very Interesting Point

It sounds to me as though the IRS staffer who wrote the language in Pubs 17 and 547 probably committed an egregious misreading of the Code. However I believe that a taxpayer has the right to make the IRS go along with what it says in its own Pubs, Revenue Rulings, and so on provided that the language you are trying to make them follow is unambiguous and is applicable to the facts of the case.

And of course this is far fetched. There are probably not ten students in University or College Housing in the US this semester who would be able to claim a casualty loss even if say a tornado caused this amount of damage to their own property. But as Bees pointed out, some of us enjoy talking about far fetched situations. I remember the first exam I took as part of my professional training. There was a comprehensive problem where one spouse owned a music store and the other had a regular job, they could profitably itemize their deductions, they had sold investments, but they qualified for both the Earned Income Credit and the Child Care Credit. (This was a long time ago, before there was a limit on NIE for EIC purposes.)

[BOB W]

The word lease does not appear in the code or regs for casualty loss. I wonder who made up that rule? Even in pub 547 where it talks about lease, just a few paragraphs prior to that it says the deduction is the lesser of basis or reduction in FMV. How do you get basis in a lease?

Maybe if you are contractually liable, you use the owner's basis for a casualty loss because if the owner paid for it, he had basis? ????????

[solomon]

It is contractual liability for DAMAGE amounts - basis or decrease in fmv would not enter into it - only the amount for damage. Granted publication 547 is not authoritative but it is something in case of audit. Agree with erchess that for any college student this is far fetched.

[BOB W]

I wonder if any leasee would report it as a casualty loss, or just report it lease repairs or something like that?

[Bees Knees]

Regulation Section 1.165-7(b) says:

(b) Amount deductible--(1) General rule. In the case of any casualty loss whether or not incurred in a trade or business or in any transaction entered into for profit, the amount of loss to be taken into account for purposes of section 165(a) shall be the lesser of either--
(i) The amount which is equal to the fair market value of the property immediately before the casualty reduced by the fair market value of the property immediately after the casualty; or
(ii) The amount of the adjusted basis prescribed in Sec. 1.1011-1 for determining the loss from the sale or other disposition of the property involved.


Regulation Section 1.165-7(a)(2) says:

(2) Method of valuation. (i) In determining the amount of loss deductible under this section, the fair market value of the property immediately before and immediately after the casualty shall generally be ascertained by competent appraisal. This appraisal must recognize the effects of any general market decline affecting undamaged as well as damaged property which may occur simultaneously with the casualty, in order that any deduction under this section shall be limited to the actual loss resulting from damage to the property.
(ii) The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that (a) the repairs are necessary to restore the property to its condition immediately before the casualty, (b) the amount spent for such repairs is not excessive, (c) the repairs do not care for more than the damage suffered, and (d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty.

[Bees Knees]

You will note that in the above cited regs, repairs are used to determine the drop in FMV of the property. Repairs in themselves cannot translate into a casualty loss. The code and regs define a casualty loss as the lesser of the loss sustained due to the casualty, or the adjusted basis in the property. If you have zero basis in the property, you have no casualty loss. It does not matter how expensive it is to fix, Code Section 165 limits your loss to basis.

A repair expense is another matter. If you lease a commercial building that is damaged by a tornado, and you are contractually obligated to fix the damage, that is a repair expense, not a casualty loss.

Again, somebody made up some rule some place. Maybe it was the courts, maybe it was the IRS through some revenue ruling. But that’s not what the code and regs say. The term "lease" does not appear in the code or regs. So I would like to know who decided a contractual obligation to fix damaged leased property means you now all of a sudden have basis in that leased property.

NYEA, have any cites for us?

[BOB W]

A repair expense is another matter. If you lease a commercial building that is damaged by a tornado, and you are contractually obligated to fix the damage, that is a repair expense, not a casualty loss.

NYEA, have any cites for us?

A large repair would probably have to be Amoritize over the term period of the lease. Where as, if it was termed a "casualty loss" it would be expensed. Of course this is still up in the air but if contractual liability exists (officialy) it would probably allow the full write off when paid.

Does that make sense?

[Bees Knees]

Of course this is still up in the air but if contractual liability exists (officialy) it would probably allow the full write off when paid.

Yes, I understand that is what Pub 547 says. You write it off as a casualty loss. However, how does contractual liability increase basis? The code and regs say you have to have basis.

One example of having basis in a lease is when you have a leasehold improvement. The taxpayer has basis in the improvements made to someone else's property and can write off the remaining basis when they abandon the lease.

It does not appear, however, that Pub 547 limits casualty losses to leasehold improvements.

[BOB W]

OK> It looks like we have beaten this to death and will have to look at this in another thread sometime in the future when the subject comes up again. Maybe there will be more info then as well as other contributors, like NYEA and some other heavyweights. Not the some good heavyweights didn't contribute, all the posts were good.

Based on the Pub 17, it looks like Leasees do not have to have basis.

[outwest]

Okay, as a tax letter I was reading said..

though pubs are not authority, they do get a lot of review before going out. So why would such a significant issue as casualty losses on leased property get by? (BTW, Pub 17 has this also, twice!)

Well maybe Rev Rul 73-41 had something to do with it:

Inasmuch as the damage in this case, involving residential property, resulted from fire, the loss sustained upon payment of the judgment was directly attributable to the fire. Accordingly, it is held that the amount in excess of $100 paid by the lessee is deductible under section 165(c)(3) of the Code for the taxable year in which the judgment was paid.

So do we have a reasonable basis? I think a Rev Ruling would work.
Do we have more likely than not? I think so, the IRS itself has taken that position in the Rev Ruling.

[BOB W]

Accordingly, it is held that the amount in excess of $100 paid by the lessee is deductible under section 165(c)(3) of the Code for the taxable year in which the judgment was paid.

What about 10% of AGI or am I just being picky and it should be assumed that the 10% of AGI is a given??????? Then why is the $100 mentioned only?

[Lion]

Leased Property

Couldn't you have some basis in leased property?. You lease a storefront office. You renovate it to add a more attractive front facade with lots of windows and expensive woods and installation costs and.... Now the wind whips around and tears the door off and your expensive wooden door was run over by a truck and the frame is trashed and much of your wood facade was dented as the door bounced off it when the wind ripped it loose. You're a renter, but you have a casualty loss, don't you? This isn't the case for the OP who had no cost in the sprinkler head. But, I worked for a company that rented our offices but had to upgrade the sprinkler system to code including relocating the sprinkler heads; so it could happen.

[JG EA]

Besides leasehold improvements, you would have basis if the lease were actually a sale according to IRS rules.