What this line means
The difference between the fair market value of the property immediately before the casualty and immediately after. This measures the actual economic damage. For a car worth $15,000 before a flood that is now worth $3,000, the decrease is $12,000. If the property was completely destroyed or stolen, the decrease equals the pre-casualty fair market value (the after value is zero).
Does this apply to you?
- You had personal-use property partially damaged in a casualty and need to measure the damage
- You had property completely destroyed and the after-casualty value is zero
- You need to determine the FMV decrease to compare against your cost basis on line 8
Easy to overlook
An appraisal is the best evidence of FMV decrease The IRS accepts a competent appraisal as evidence of FMV before and after the casualty. For real estate, a professional appraiser’s report carries far more weight than a Zillow estimate or your own opinion. For vehicle total losses, the insurance company’s settlement value typically establishes the after-casualty FMV. Without documentation, the IRS can disallow the claimed FMV decrease entirely. 1 General filing pattern — FMV appraisal errors in casualty claims
Cost of repairs is acceptable as a proxy for FMV decrease in some cases If you repaired the property to its pre-casualty condition, the repair cost serves as evidence of the FMV decrease — provided the repairs only fixed the casualty damage, the cost is not excessive, and the value after repair does not exceed the pre-casualty value. This is often simpler than getting two appraisals. 2 IRS Publication 547 — Casualties, Disasters, and Thefts
Watch out for this
Claiming the decrease based on replacement cost rather than fair market value. If your 10-year-old roof was destroyed and you installed a new one for $15,000, the FMV decrease is not $15,000. The old roof had depreciated value. The decrease is the difference in the property’s overall fair market value before and after the casualty, which accounts for the roof’s age and condition.
Footnotes
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IRS Publication 547, Casualties, Disasters, and Thefts, Proving a Loss. https://www.irs.gov/pub/irs-pdf/p547.pdf ↩
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IRS Publication 547, Casualties, Disasters, and Thefts, Decrease in FMV. https://www.irs.gov/pub/irs-pdf/p547.pdf ↩