What is the basis for calculating casualty loss deductions for a non-disaster home loss?

The correct basis for calculating casualty loss deductions for a non-disaster home loss is the fair market value of the home. This approach is essential because it reflects the current value of the property before and after the loss occurs. Specifically, a casualty loss is determined by the decrease in fair market value that results from the casualty event.

To illustrate, if a home is valued at $300,000 before a fire and $250,000 after, the casualty loss would be $50,000. This method ensures that taxpayers can claim a deduction that accurately represents the financial impact of the loss on the value of their property.

In contrast, using the home’s original purchase price would not reflect any changes in market conditions, such as appreciation or depreciation over time. The home’s basis minus any improvements would also not be appropriate for this calculation, as it doesn’t effectively capture the actual decrease in market value due to a casualty event. Saying that no deduction is allowed would be incorrect, as there are provisions for claiming deductions under specific circumstances, even for non-disaster losses. Thus, fair market value is the most relevant measure for determining casualty losses in this context.