Question

Tania is a retiree living off of social security and spends her days on her house boat floating up and down the Sacramento River. One day in 2017, Tania heard a loud noise and it appeared something had struck her boat. As she peaked her head out the window a man dressed in a pirate outfit yells “Sorry about that, I was testing out my new cannon ball and accidently struck your boat.” Tania’s boat ended up sinking to the bottom of the river. When it comes to determining Tania's deductible loss for her boat the first step is to determine the lesser of these two things.

a) Adjusted Basis, Insurance

b) FMV before event-FMV after event,

c) Adjusted Basis FMV before event-FMV after the event,

d) Insurance Original Cost, Adjusted Basis

Answer 1

b) FMV before event - FMV after event

Explanation: For the purpose of calculating the amount of deductible loss, first thing is to select the lower of FMV of the property after the event or FMV of the property before the event (or the original amount of the asset). Further, this amount of FMV would be deducted from the amount recovered from Insurance claim to arrive at the deductible loss from damage to property.

Adjusted basis is not taken for deductible loss as FMV is considered and taking adjusted basis would give a wrong picture as FMV post event is considered.

Insurance is the second step after knowing the amount of FMV of the asset damaged.