When determining casualty loss for a partly destroyed property, which is used for deduction?

When determining casualty loss for a partly destroyed property, the correct approach is to evaluate the lesser of the decrease in fair market value or the property's adjusted basis. This method helps ensure that the deduction reflects the real economic loss experienced by the property owner.

The adjusted basis represents the original purchase price adjusted for factors such as improvements and depreciation, providing a more accurate measure of the property's investment. On the other hand, the decrease in fair market value captures the actual market impact caused by the casualty event.

By using the lesser of these two criteria, taxpayers are prevented from over-deducting on their income tax returns. This aligns with IRS guidelines to accurately reflect the loss incurred while protecting against inflated claims that could arise if the full market value were considered without constraints. This balance helps maintain fairness in the tax system and prevents abuse of casualty loss deductions.

This method ensures that the taxpayer receives a tax benefit proportional to their actual financial loss without exceeding reasonable limits.