 Hello and welcome to the session in which we would look at series of examples that deals with casualty and theft losses. These topics give students a little bit of confusion so I will try to clarify it through these series of examples. Under the given circumstances, analyze how a loss on rental property should be handled. So we have some sort of a rental property, a building with a basis of 660,000. The fair market value before the loss for the building was 820. The fair market value after the loss is 220. Simply put, there was some sort of a casualty loss on this. A tornado, a flood, it doesn't really matter. How do we compute the loss? Well, here's what we're going to do. We're going to choose the lower of the basis which is 660 and the reduction in fair market value. Well, the property went from 820,000 to 220,000. There's a reduction of 600,000. Which of the two we are going to choose? 600,000. Can we take this deduction? And the answer is yes. This is a rental property and this is a deduction for AGI. Let's go ahead and look at example two. Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Myles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today. Emily in 20x2, she was in a car accident. She was totally safe. Her car was used for personal purposes, had a fair market value of 320 and adjusted basis of 16. Unfortunately, the car was completely destroyed. Emily received an insurance payout of 10,000. Emily's adjusted gross income was 40,000. What would be Emily casualty loss deduction considering any limitation? Well, what do we have to do? We have to choose between the lower of the basis or the reduction and fair market value. The fair market value reduction went from 32,000. The car was completely destroyed, went down to zero. The lower of these two is 16,000. We choose the 16,000. Then we will deduct from the 16,000 potential loss, $10,000 in insurance. Losses that's left 6,000. Now bear in mind, this is a what? This is a personal use. Therefore, we have to deduct $100 by the IRS as a floor. What's left is 5,900. Is this the loss? No. Then we have to compute 10% of our AGI. Her AGI adjusted gross income is 40,000. 10% of that is 4,000. So her loss is 1,900, which is the access amount over the 4,000. So her loss is 5,900. In access of 4,000, what's left is 1,900. Not used. This loss, basically with all this calculation, we cannot take this loss between 2018 and 2025 unless this is a federally declared disaster area. Now starting in 2026, well, she will take this loss from AGI, not for AGI, from AGI. Let's take a look at this third example. In the current year, Adam experienced the following gains and losses from personal casualties taken into account the deduction of $100. That's fine. We already took that into account. So we have a loss from asset 1, 1,500, the gain of 1,000, and another gain of 3,000. Now if we net them, if you notice here, we have a gain of 2,500. Well, why would that happen? This would happen if the insurance proceeds were greater than the adjusted basis. So we have a gain. We could have a gain. Once we have a gain, what do we have to do? We're going to treat this as capital gains and capital losses. Now this 1,500 loss, we have to look at it as long-term capital loss. This three-month gain, it's going to be short-term capital gain. And this asset 3, which is four years, is long-term capital gain. What do we do now? Well, let's net the short-term together. If we net the short-term together, we're going to net, we're going to have $500 short-term capital loss. Then we're going to take the gain 3,000 and we're going to have left 2,500 long-term capital gain. Simply put, we will treat these losses and gains as short-term and long-term capital gains. Just like long-term and short-term capital gains, this 2,500 will go with other short-term and long-term capital gains and losses after we net them out. Now this is a special situation where we had a gain. Let's assume, on the other hand, let's change the 1,500 for the sake of illustration to 5,000 of a loss on asset 1. If we go 5,000 of a loss, what we're left with now is a total loss of 1,000. Now this 1,000, well, assuming we are in a federally declared area, we can use it. Then we have to compute 10% of AGI and see if the $1,000 exceeds that or not. This is what we're going to have to do. Okay? Or what's going to happen is if it's not in a federally declared area, we cannot take this deduction between 2018 and 2025. Otherwise, look at the previous example, example 2, to see how we will treat a net loss, a net loss. What should you do now? To learn more about casualty and theft losses, whether you are a CPA candidate, an accounting student, or an enrolled agent, go to Farhat Lectures and work MCQs. Study hard, good luck, and stay safe.