Casualty Loss Deduction

Traditional vs. "Block" Approach

EXAMPLE: 10 years ago you acquired a 40-acre loblolly pine plantation for a total cost of acquisition of $20,600. At that time the trees were just 8 years old, but you assigned value to their years of growth and allocated $15,840 to your Land Account and $4,760 to your Timber Account. Last year, 17 acres of the trees were completely destroyed by a fire. Immediately before the fire, the entire plantation contained 640 cords of pulpwood, of which the 17 acres that burned contained 272 cords with a fair market value of $3,808. Calculate your casualty loss deduction. 

If you use the traditional approach, your casualty loss deduction will be--
  1. Determine the depletion unit:

Depletion Unit

= Total Adjusted Basis   Total Timber Volume
= $4,760    640 Cords
= $7.44 per Cord
  2. Multiply the depletion unit by the number of units destroyed:

Allowable Loss

= Depletion Unit x Number of Units Destroyed
= $7.44 per Cord x 272 Cords
= $2,024
  3. Subtract any gain you recover or expect to recover from a salvage sale, insurance, etc.

Loss Deduction

= Allowable Loss - Recovery
= $2,024 - $0
= $2,024
If you use the "block" approach, your casualty loss deduction will be--
  1. Determine your total adjusted basis in the "block" on which the loss occurred: 
$4,760
  2. Determine the fair market value of the timber destroyed:
$3,808
  3. Compare the two amounts: your deduction is the smaller amount, minus any gain 
      you recover or expect to recover from a salvage sale, insurance, etc.

Loss Deduction

= $3,808 - $0
= $3,808

Example provided by Dr. John L. Greene, Forest Economist, USDA Forest Service.