At least there’s a silver tax lining if your property is stolen or vandalized: If you qualify, you can claim a theft loss on your personal tax return, subject to certain limits. As evidenced by a recent ruling on a Tax Court case, Partyka, TC Summ. Op. 2017-79, 10/25/17, it shows to be the exception that the loss generally has to be claimed in the year the theft occurred.
For starters, theft losses are grouped with casualty losses, such as damages caused by wildfires and hurricanes, on Schedule A of your return. The total of your unreimbursed loss for the year is deductible only to the extent it exceeds 10 percent of your adjusted gross income (AGI) after subtracting $100 for every theft or casualty event. (This total is reduced by any insurance reimbursements.)
Normally, a theft loss is allowed only in the year in which it is sustained, which is typically the year you discover it. However, under the prevailing regulations, a theft loss isn’t sustained when there is a claim for reimbursement that has a reasonable prospect of recovery. This is determined by all of the particular facts and circumstances.
In this recent case, the taxpayers, a married couple, rented their fully furnished 3,800-square-foot home in Florida, to tenants in 2011. When the home was listed for rent, the couple contemporaneously photographed each of the rooms with the furnishings. Some of the furniture and accouterments were to be sold to the tenants, including chairs, a bedroom set, a cocktail table, assorted plants, vases, lamps and other miscellaneous household items.
After the tenants’ checks for the initial rent and security deposit bounced, the taxpayers launched an action for legal eviction. When they gained access to the rental home, they discovered that the tenants had removed all of the furnishings, plus some damage had been inflicted. The couple took photographs of the interior and exterior of the home on the day they gained entry.
Upon discovering that furniture was missing, the couple contacted law enforcement officers and made a formal complaint. They scavenged through a rental truck containing some of items that the tenant had left on the street. Also, the authorities found the tenants with another truck containing some of the household items. The couple searched this truck as well. It was a time-consuming process because their items had been commingled with the tenants’ items. The next day, the tenants and the trucks disappeared.
The couple didn’t claim a theft loss deduction for 2011 because of the possibility that some or all of the illegally removed items would be returned. During 2012, after consulting lawyers and law enforcement, they determined that it would be a waste of time to pursue the tenants, either civilly or criminally. On their 2012 joint Form 1040, they deducted a loss of almost $30,000.
Although the Tax Court conceded that the theft was discovered in 2011, it concluded 2012 was the year of the theft loss. The couple conducted their due diligence with respect to the stolen items. Accordingly, it was not until 2012 that they were able to ascertain, with reasonable certainty, that they couldn’t obtain reimbursement for the theft loss of their household furnishings.
Unfortunately, however, the story didn’t have a happy ending for the taxpayers. The Tax Court disagreed with the valuation on most of the items. It determined that the couple didn’t adequately substantiate their claims and provide reliable evidence of their worth.
Advise your clients about the need for recordkeeping. The records, coupled with “before” and “after” photos or videos, are the best proof you can have in case a theft occurs.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.