What this line means
The cost or adjusted basis of the property that was damaged, destroyed, or stolen. For most personal-use property, this is what you originally paid for it. If you made permanent improvements (a new roof, an addition), add those costs. If you previously claimed casualty losses on the same property, subtract them. The basis sets the upper limit on your deductible loss.
Does this apply to you?
- You are calculating a casualty or theft loss on personal-use property
- You purchased the property and know the original cost
- You inherited or received the property as a gift and need to determine its basis
- You made improvements to the property that increased its basis
Easy to overlook
Inherited property uses fair market value at date of death, not original cost If you inherited a home from a parent, your basis is the fair market value on the date of death (the stepped-up basis), not what the parent originally paid. Using the parent’s purchase price from decades ago dramatically understates your basis and inflates your deductible loss. 1 IRS Publication 551 — Basis of Assets
Permanent improvements increase your basis A new roof, remodeled kitchen, or added bathroom increases the cost basis of your home. If you paid $250,000 for the house and later spent $40,000 on a roof and renovation, your adjusted basis is $290,000. Forgetting to include improvements understates your basis, which reduces the loss you can claim. 2 IRS Publication 547 — Casualties, Disasters, and Thefts
Watch out for this
Using the current market value instead of your cost basis. Line 2 asks for what you paid (adjusted for improvements and prior losses), not what the property is worth today. Market appreciation is irrelevant. If you bought a house for $200,000 and it is now worth $400,000, line 2 is $200,000 (plus any improvements). The current value affects line 5 and line 6 (fair market value before and after the casualty), not line 2.
Footnotes
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IRS Publication 551, Basis of Assets, Inherited Property. https://www.irs.gov/pub/irs-pdf/p551.pdf ↩
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IRS Publication 547, Casualties, Disasters, and Thefts, Figuring a Loss. https://www.irs.gov/pub/irs-pdf/p547.pdf ↩