How do I calculate the value of my loss?
Generally, it is more complicated than you might suspect to figure out what amount you can claim as the value of a casualty or theft loss. First, you should determine what your “adjusted basis” of the property was, prior to the casualty or theft. If the property was for the purpose of producing income, or some other business related purpose, this adjusted basis (less any insurance payments or other reimbursements) is the value you can claim as your loss.
If the property was for your personal use, in addition to calculating the adjusted basis of the property prior to the loss, you must also calculate the property’s change in fair market value, which is the amount of the property’s fair market value right before the casualty or theft minus the property’s fair market value right after the casualty or theft (for stolen property, the fair market value after the theft is considered to be $0). The best way to determine the decrease in fair market value is by having the property appraised, and comparing that appraisal to an earlier appraisal from before the casualty or theft. Once you have calculated this amount, you should compare it to the adjusted basis of the property - whichever number is smaller is the deductible value of your loss (less any insurance payments or other reimbursements).
In addition, for personal-use property, you must also apply the $100 and 10% limits to the amount of the claimed loss.
For example, suppose you purchased a rare book 10 years ago for $100 and the book was stolen this year, when it was valued at being worth $1,000. Since the book was for personal use, you must calculate both its adjusted basis and the change in its fair market value. The book’s adjusted basis is $100, which was your original investment in the property. The change in fair market value is $1,000 (since the book was stolen, it’s fair market value after the theft is $0). Since you can only deduct the lesser number, the value of your loss would be $100. Because of the $100 limit, this means you have no actual deduction for the theft of this book.