Casualty Loss of Value Due to Ice, Wind, Storm or other Damage to Trees

 

    
Having a mature tree blown down in a storm can be devastating.  Whether the damage to your trees is due to ice, wind, storm, tornado or other sudden damage, no one wants to lose a prime tree or trees.   

While it can't replace your damaged trees, the government has a provision where you can take a Casualty Loss on your Tax Return. 

Studies have shown that having mature trees and or landscaping on your property can in some cases, double it's value.  The loss can significantly damage the value and marketability of your property and this loss can be deducted legally. 

I hope that this information will serve as a starting point for discussion with your Tax Preparer.  This information was believed correct when it was prepared, but be sure to consult the IRS website for the most current information. The impact with the tree lying on the house is apparent, but there are a number of factors at play. 

First of all (after removing the tree and fixing the roof) the Market Value of the house has been damaged.  The "Street View Appeal" has likely been reduced by the loss of the tree and that loss is not  insignificant.  It may be expected to reduce the appeal of the property and cause a loss of value.  Studies have shown that mature trees and beautiful landscaping can double the value of a property.  Any loss of value could be significant.  Now the larger loss generally involves a heavily wooded and beautifully landscaped property, but it is not unreasonable to believe that the loss of a tree or trees could easily have an impact from 5% to 15% or more depending upon their size and placement.  

Definitely some things to discuss with your tax preparer.  Scott Appraisal can assist with an analysis of the impact and casualty loss of value.

In addition, the house faces west.  The trees block the late afternoon sun.  The government has stated that the shade of a mature oak tree falling on a house was equivalent to a 5 ton air-conditioner.  The loss of a portion of this shade may be expected to cause an increase in utility bills for at least the next ten, twenty years or longer.  I suspect that your Tax Preparer may not be able to include this factor, but be sure to ask.

This is definitely something to discuss with your Electric Company if they want to "Trim" (some say Severely Butcher) your trees along the electric line. 


 
This tree was massive, and a show piece that added significant value. It's loss and impact on the value of the property was profound.  You can get an idea of the size the tree must have been by looking at the remaining stump. 

If you are looking for the IRS Section Reference, scroll to near the end and look for "IRS Publication 2194 Disaster Recovery Guide for Individuals and Businesses"




You might ask, May I take a tax deduction for costs related to storm damage, the loss of trees due to Storm, High Winds, Tornado, Ice or Snow?  Yes, the IRS does allow what they call a Casualty Loss.  This article will discuss Casualty Loss of Value Due to Ice, Wind, Storm or other Damage to Trees, but it may also be applicable to other types of losses as well. Discuss this with your tax preparer, and you might want to take a link to this article with you.   

Disclaimer, I am not a tax expert.  You need to discuss this matter with a tax professional, however, I hope that this may give you the information to act as a starting point in your conversations. 

In some situations, trees can double the value of a property. Conversely, if this describes your property, the potential loss of value could be up to one half the entire value of the property. 

The general rule of thumb is that If the damage is easily noticeable, it is likely that it could have a 10% or greater impact on value.  
The loss of a significant tree or trees could easily affect your property value by 10% to 25% or more, and in some extreme cases up to half or 50% of the total value of the property.  You might have heard the three factors that affect value the most are location, location, and location, but a component of "location" is the look and appeal of the neighborhood and much of that is dependent upon the number and quality of trees in the surrounding area.  This factor is frequently overlooked by some appraisers. 

I first encountered this phenomena in my home town.  Three streets had been developed about the same time, many of the houses were built by the same builder, but the center most street was lined with Elm trees that had grown to overlap the street and formed a complete covered canopy.  Driving along that street was like driving through a green tunnel.  Houses along that street sold, literally double the price of an identical house the next street over.  One month I appraised a house on the center street for a lender pursuant to a sale and a few weeks later, a house that almost backed up to the first, the next street over, but was one lot to the south.  The houses were the same floor plan, the same size, and had a similar, although not exact level of updating and maintenance, yet the sales price on one was double that of the other.  Nothing was different  except the higher priced home was on the tree lined street.  I followed pricing on these streets for many years and the price differential remained fairly constant.  Our town was severely affected by Dutch Elm disease and we lost many of our mature Elm trees. These streets were decimated.  Virtually every Elm along them perished and were removed.  Today, there is very little difference in sales prices between similar houses on these streets.  The trees were the only difference and caused houses on the center street to sell for twice the price of those one street over.  That is how much impact trees can have. 

Most appraisers have encountered a few, really nicely landscaped properties, heavily covered by mature trees, beautiful landscaping, where the purchaser has paid what appears to be an extremely high price for the property compared to what the appraiser had found for comparable sales.  Not all buyers are willing to pay a premium for a property such as this, but there are enough that it is a viable market segment that should not be ignored.  The problem is two fold, most appraisers are so busy cranking out appraisals that they chalk it up to "The Buyer simply paid too much and may not look any further.  Secondly, few, if any of the recent, available comparable sales, have this level of trees and landscaping.  It is extremely difficult to find support for this kind of price, and many appraisers simply fail to take the trees fully into account.  I have seen some appraisers who appear to have completely failed to realize that the market, at least a smaller market segment, recognizes the value of mature trees and are willing to pay a premium for them.  This, coupled with the fact that these properties seldom sell and when they do, it is not easy, if not impossible, to identify them as potential comparables since most MLS Data Sheets simply indicate "Mature Trees" and most Realtors, given a very limited space to describe the property, don't waste words talking about the trees when they could be describing the granite counter-tops and whirlpool tubs.    

These are factors that people quite often are willing to pay significantly higher prices for, but appraisers seldom take the time to account for.  I probably would have missed it myself had it not been for my first hand experience with identical houses one street apart, one of which sold for double the price of the other.  Additionally, I have had the benefit of being a Realtor as well as an Appraiser.  I've been able to observe and visit with buyers, to see the things that affect their buying decisions and to see how they react to different factors.  It does not always make sense.  For example, for the most part, and there are exceptions, most people grossly overestimate what it is going to take to make relatively small repairs and will lower the amount they are willing to pay by a significant amount.  It is not uncommon to see a Buyer offer $10,000 less for a repair that should cost between $2,500 to $3,500 to hire someone to completely fix.  At the same time, they tend to accept property that needs a major amount of repair with a relatively minor discount. 

The largest of these that I've personally seen was a property that I'd estimated the cost to repair at $40,000.  The Buyer, an investor who regularly bought distressed properties as rental units, proceeded to ignore the repair figures, said he'd buy it if they gave him a $10,000 discount.  They did, he did, and we closed on that property (Fully against my recommendations).  All this is said to demonstrate that Buyers quite often behave differently than one might expect.  My experience as both appraiser and real estate broker and sales person have given me a depth of insight that might be missed otherwise.  It used to be that appraisal was considered a highly specialized part of the real estate business, but in recent times, it seems the trend is to go one direction or the other.

Damage to trees can occur from a variety of sources, a natural disaster such as a tornado, hurricane, ice storm, fire, vandalism, negligence, or a variety of other reasons.  A neighbor may mistake property lines and cut your trees by mistake, a pipeline may cut through the roots of a major landscape ornamental tree, and fire may ravage a community or area. Damage can be done by driving a truck across the root zone of trees, and heavy equipment can cause Severe, even Fatal Damage, although it typically can take several years for the damage to become apparent.  Extremely heavy tree trimming Utility Company trucks have been observed driving across root zones (the area under the canopy of the tree and beyond)  with apparently little or no concern over root damage that could be caused by compaction of the soil.  I have been told that is the soil is very dry and hard, the impact may be lower, but if the soil is moist and soft, NOTHING should be driven over the roots or the area under the limbs (the drip line), and preferably staying even outside this area.  I had the Utility Company's "Urban Forrester" argue up a blue streak that driving their multi-ton (when empty) chipper shredder truck that was now fully loaded and perhaps weighed far in excess of this, that it wouldn't hurt a bit to drive in moist soil over the root system.  All I can say is that I've seen a number of reports that contradicted her.  Additionally, she stated that the entire limb must be removed to the trunk, when only about 5 or 6 inches of the outer twigs went over the power line.  We wouldn't want to loose power if 100 mile per hour winds whipped those limbs against the power line.  Well, actually, if a 20 or 200 mile per hour wind whipped those limbs against the power line, the power line would act like shears and cut the leaves off without even noticing.  Their Urban Forrester Insisted that they Must achieve a 4 year growth cut-back.  The only problem is, that 20 years earlier, they'd taken a 4 year cut-back.  Four years later, they inspected and determined nothing needed to be trimmed.  Four years later, the same, four years later, the same.  Finally, it was now 20 years later and the twigs were perhaps 6 inches over the line.  If you were keeping count, what the Utility Company did, some 20 years earlier, was take a 20 year cut-back and called it a 4 year cut back.  I didn't know how fast Elm trees grew back then.  Turns out, they grow fairly quickly.  It's just that the Utility Company, it appears, wanted to reduce their costs so that they wouldn't need to trim for another 20 years.  This can reduce their costs to a quarter of what they would be if they honestly took a 4 year cut-back, yet this time, their Urban Forrester insisted the entire limb needed to be removed back to the trunk, or three times the length that resulted in a 20 year cut-back. 

Why would they misrepresent the facts as they did?  Money comes to mind.  I've known some really conscientious Urban Foresters, but I've also met some whose integrity was for sale to the lowest bidder.  What am I saying?  If you're faced with an "expert" who has a vested interest in what they are telling you, do your own research.  There are a number of Universities that have studied trees, damage to roots, and my personal favorite, removing an entire side of limbs.  Not only does this leave all the weight on one side of the tree with no counter balance, but in wet weather, trees have been known to simply fall over when their roots turned loose.  This is not the biggest factor however, and that is tied between the loss of shade.  You may recall I mentioned earlier that the US Government study indicated that the shade of a mature Oak tree falling on a house was equivalent to a 5 ton air-conditioner, so the loss of the shade will greatly increase electricity usage for air-conditioning, but also make the trees with one side cut bare, less able to protect the trees from snapping in high winds.  Studies have indicated that the limbs, swaying in the wind, dissipate the energy, similar to the way shock absorbers dissipate the energy in a vehicle.  Without the limbs to absorb and reduce the impact of the wind, engineers have stated that the trees are more susceptible to breaking in winds they could have endured, if they had had the limbs in place. 

The perfect case in point.  The Tree  trimmers for the utility company, cut all the limbs on one side of all the trees along the power line behind houses along Elmhurst, north of Frank Phillips extending to Tuxedo Blvd.  Bartlesville experienced high winds, but winds we have been said to have experienced before.  This time, however, the trees snapped, toppling into back yards and on to houses leaving homeowners to pay thousands upon thousands of dollars for repair and removal.  If the limbs had been cut back to a 4 year growth, rather than entirely bare to the trunk, would this have prevented this loss.  It is impossible to say in this specific instance, however I've seen engineering studies that seems to indicate that this is entirely likely, and appeared to indicate that clear cutting the entire side of the trees could place the blame squarely upon the shoulders of the Utility Company.  I have not heard that they were involved in any of the clean up. 

It seems the Utility Company is wanting people to reduce their electrical consumption and has been offering thermostats that all the Utility to turn off your air-conditioning during peak periods, yet doesn't appear to have a clue about completely removing trees that shade houses.  The bottom line is that if you have tree trimmers knock on your door, do some research, find out exactly what they plan to do and how much they plan to cut.  I hate loosing power during an electrical storm and realize some trimming needs to be done to protect the grid.  At the same time, I've had the Utility Company's representatives lie to my face.  You remember that multi-ton truck I told you about, I'd asked them to swing wide, avoid driving over the root line of the trees, but stay outside it.  The did, they swung wide, approached the tree outside the drip line and promised to go out the same way they came.  I left for lunch, and when I returned, found that the truck had pulled in under the drip line, circled the entire tree one and three quarters turns around the tree (3/4 would have gotten them out, but they gave it a full additional circle, apparently, just for spite, because I questioned them, I assume). 

I found it interesting.  Virtually every time they came and wanted to cut my limbs (despite what we later determined had been a 20 year cut back rather than the 4 year they promised) their spiel always seemed to be the same, Scare Tactics, let us cut it or You will be Responsible for the Cost to Forever after that.  If too many neighbors became concerned, they'd just move to a different neighborhood, or even different town, and come back several years later after all the "trouble makers" had settled down.  This was a tactic that I saw repeated numerous times.  Could the Utility Company be responsible for a Casualty Loss Deduction?  Could they be liable for damage?    Those are probably questions for your attorney, and questions that you should ask if you are affected.  The Utility Company definitely has the right to trim trees, however, how much they can trim is the main question.  The Corporation Commission regulates the Utility Companies and may be able to provide some additional information about how much the companies are permitted to trim.  The amount of oversight is questionable. 

If you have suffered the loss of trees due to ice or other factors, first let me say I'm sorry.  Is it worthwhile to have an appraiser estimate the amount of loss for casualty loss purposes?  Very likely, yes!  In my experience, I have found that many people, even some appraisers, generally tend to grossly underestimate the value of trees.  It is important if not critical to select an appraiser who recognizes the full contributory value of trees and has experience in this particular area.  Some appraisers focus so heavily on the mass production of appraisals for mortgage lending, that they seldom spend time doing the research required to fully recognize and document the value of trees or damage to trees.  Be sure to ask them to describe their experience with tree valuation and its effect upon property values.

Also, be aware that there are several ways to value trees, one is their value as lumber.  If someone mentions calculating the number of board feet or measuring the diameter 4 feet above ground, that's NOT what you want.  They are talking about the value of the tree for lumber, not its effect on the value of the property.  While the value as lumber can be substantial, typically the value of the lumber contained in a tree is much less than the contributory value to the property.  There have been numerous instances where a heavily wooded and nicely landscaped property sold for twice the price of a similar property without those features. The market certainly did recognize the value and was willing to pay for it.  When you lose a significant tree, the loss of value can be quite real.

Loss of value can occur from a variety of sources, both within the property lines and outside them.  Value is maximized through the Theory of Conformity, that is, in a nut shell, as long as all properties in an area are essentially similar and harmonious, value is maximized.  When properties differ, value can be lost, for example, a rundown property in the neighborhood can negatively affect values of nearby properties.  Many factors can affect value, but for this article, we will focus primarily on damage to trees and landscaping, but primarily trees.

Recent Ice storms in Oklahoma, high winds or Tornado's in other states have resulted in the loss or damage of many trees. Consumers will want to check with their tax preparer to see if they would benefit from considering a Casualty Loss on their tax return.

A Damage Appraisal is an assessment of the reduction in monetary value of a property for loss of trees, due to an identifiable cause or event. Its purpose is to assist the client in the recovery of the monetary loss through an insurance claim or legal action, and in some cases, a tax write-off of the casualty loss.  The appraiser provides a valuable service by providing a piece of paper (the appraisal) that is worth cash to his client.

What someone will pay is what determines how much the real world actually values trees.  Researching, documenting and supporting the appraisal is difficult and involved, there is no simple cookie-cutter formula that can be applied in most situations.  Each property is individual and a detailed analysis is required if the appraisal is to be supportable in a court of law.



Photos were taken in early spring before the leaves had fully filled out.  The framing effect was more pronounced the previous summer when the leaves had filled out. The main point is that the once perfect framing of the residence between the two mature trees was lost.  Street appeal was affected and street appeal has a significant effect on value.  In this case, the loss of value would have been significant. 


Monetary Value of Trees.  How Much are my trees Worth?

First, it is very important to know that there are two totally different answers to this question.  The first value is the value of the lumber contained in the tree.  This is calculated by measuring up 19 inches from the base of the tree and measuring it's circumference at that point.  That is NOT what we're addressing here.  If anyone talking about the value of your tree mentions 19 inches above ground, they are talking ONLY about the lumber. 



For this article, we are talking about the contributory value of trees to the house and property as a whole, and how much of a loss of value to the house/property is caused by the loss of a tree or trees due to winds, storms, tornado or hurricane, or any other sudden loss.

The term "sudden" is important to the IRS, see their article for details, but sudden as opposed to a decline over a longer period of time is required to claim a loss under this category. ( Talk to your tax adviser for details.  )


How do I calculate the monetary value of my trees?  What are my trees worth?  That depends upon a number of factors, without knowing a lot more, it is impossible to say.  It's like estimating the value of your house, it takes research and analysis, but a reliable estimate of value can be found.   I can, however, tell you that there are a number of cases where trees and landscaping have resulted in houses selling for twice the price of similar houses that lacked the trees and landscaping, in these cases the value was doubled, so the potential is quite large.  In other words, in these cases, the trees and landscaping were worth half the sales price of the property.  These are extreme examples and of course not all properties will have the same values, but in many cases where there was a significant contributory value from trees and possibly landscaping, it is often possible that an appraiser failed to recognize it and simply thought "they just paid too much!"  If the market recognizes value, and it obviously does recognize the value of trees, landscaping, and other factors that when combined, are often referred to as "Magazine or Showcase Quality" it must be taken into consideration by the appraiser.  The problem is that the data is extremely limited.  The number of "Showcase Properties" that sell are a very small percentage of all sales and are often difficult for an appraiser to locate or identify.  Additionally, although Buyers and Sellers in the marketplace recognize the value, and are willing to list, and make an offer to purchase these properties unless they are able to pay cash to close the sale, they often run into an appraiser

The question becomes, how much value did the tree(s) that broke or died due to ice or other cause, contribute to my property and how was my value affected? 

(Be aware that repeatedly driving across soil above the roots of a tree could compress the soil and kill the tree.  This usually takes place over a period of time, during which, the tree may decline before dying.  Generally, a sudden loss is required to take a Tax loss, but there are exceptions.  SEE: Sudden Loss at the end of this page)

Measuring value is what real estate appraisers do. It is widely recognized that trees can have a substantial affect upon value, and it stands to reason, that the loss of a tree can also affect value, the question is, by how much?

How much was my value impacted by the loss of a tree or trees?  The simple answer is, I can't tell you.  At least not without knowing a lot more about the whole picture.  I can give you some guidelines, however.

First, the loss of a single, large tree or group of trees that were a focal point for the entire property can have a major impact.  



   


  

While losing an entire tree could have a profound impact on value, even having the top blown out of a tree could have an impact upon value that should be considered. 



Despite losing half the tree, the impact from the loss of this Redbud tree will be minimal due to its size and the number of trees around it. The loss is less noticeable, therefore the impact will be minimal. 




This, on the other hand, is more significant, despite the surrounding trees. 


 
The loss of a Mature Specimen Tree is significant. 
 (note the stump above which shows the original size)


The loss of a single tree, out of a group of trees, where the one lost was not particularly noticeable, will have a lesser impact or possibly no impact at all,
if no one notices it's gone.  The loss of a single branch may have no loss of value, however, if that branch had extended out to "Frame" the house, such as framing in a photo, the loss could be significant.  Each case is different, but it is not uncommon for the loss of a significant tree to impact the value of a property by 10% to 25% or more.  In a situation where a property sold for twice the value of a property without trees, the loss of all trees could literally be half the value of the property.  This is an extreme case, but it could happen, each case is different.

What I can tell you is this, in Arizona a property sold for a little over a million dollars while a similar property that had a backyard waterfall, trees and attractive landscaping sold for over two million.  In this case, the value more than doubled. In another town, houses that faced a tree lined street literally sold for twice the price of houses on the other side of the block on the next street over, that had few trees, the houses were virtually identical and touched each other on the diagonal, in other words, if the lower priced house had been one lot to the north, they would have backed up to each other.  There are many other documented cases where the presence or absence of trees can double the value of properties.  So, the conclusion can be drawn is that trees and landscaping certainly have the potential to double the value of a home.

With this as an upper limit of value, your loss could be anywhere between this and zero, however, it is not difficult for something as noticeable as trees to easily have an impact of 10% to 20% and very likely, much more.  It is possible that as little as a 5% loss on a $50,000 property ($2,500 loss of value) might be worth pursuing, and the higher the value of the property, the more likely that an appraisal would be cost effective for the property owner.  Damage that is such that the typical passerby would notice the difference is quite likely to cause a loss of value in the range of 10% to 20% or more.

For a home worth $250,000 a conservative loss of 10 to 15% would total $25,000 to $37,500.  Please bear in mind that I'm trying to be conservative and not get your hopes up unrealistically, but the simple fact is that trees often contribute a significant amount of value to the value of a property, sometimes as much as doubling its value.  In this scenario, the amount of loss on a four million dollar property could potentially be up to two million dollars.

How do appraisers determine market value?  A part of the process involves what we call matched sale comparison, in other words, properties that have sold that are as similar to each other as possible with the exception of a single factor (or multiple factors that can be adjusted for to leave only a single point of difference).  In a case where a tornado destroyed all the trees and making it very simple for demonstration purposes, we would look for the sale of two houses, one with large mature (similar)trees and one without but identical in all other factors including location.  Assuming that trees are the only difference, the difference in sales price may be considered the contributory value of the trees, and as such, the amount of the loss.  The tricky and time-consuming part (which makes the appraisal more expensive) is finding the right properties to use for comparison purposes, especially on top of the market properties where comparables may be difficult to find, to begin with. 



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In addition to the contributory value of the trees, the federal government long ago calculated that the shade of a mature tree falling on a house was equivalent to a 5-ton air-conditioner.  When you take into account the additional energy savings or loss of savings, the amount of loss increases far beyond the original incident.

The bottom line is, if you lost a few branches that no one else would notice, it's probably not worth your time to hire an appraiser, however, if the loss is such that friends, neighbors or passers-by do notice, it probably is in your interest to hire an appraiser.  If the loss is such that the typical reaction is stronger than to simply notice, the impact may be significantly higher than any figures mentioned above, quite possibly in the 25 to 35% range.  If you happen to have one of those rare properties where the trees and landscaping have doubled the value of the property, the loss could equal half the value of your property.

I can tell you that in my experience, homeowners, as well as many appraisers, tend to grossly underestimate the value of trees and would suggest that, at a minimum, you consult with an appraiser who is experienced in estimating the value of trees for Casualty Loss.

As a note of caution, be sure to ask the prospective appraiser if he or she is has had prior experience in estimating the loss of value due to the loss of a tree or limbs.  The typical residential appraiser of today frequently focuses so much of their time mass producing appraisals for first mortgage lenders, that they don't take the time to do the research necessary to produce a report that is satisfactory for supporting loss to the IRS.

Appraisers at Scott Appraisal Company in Bartlesville, Oklahoma are familiar with this and although we work primarily in Oklahoma, arrangements for appraisal assignments in other states are possible, please contact us for details. 



DOCUMENT YOUR LOSS:

What can I do to prepare for the appraisal and assist the appraiser?  Having a good set of photos that the appraiser can take with him and keep for his files, , showing the before and after photos if available.  Take photos immediately of any downed or damaged trees or limbs.  If the appraiser can actually arrive before the trees are removed, in many cases, can greatly assist the appraiser in knowing exactly what he or she is dealing with.  A recent, prior appraisal can also be helpful. If you've purchased your property fairly recently, your Lender may be able to provide you with an appraisal, or you may have received one in your loan package.

When you take photos, place an item against the tree or limb to show size, such as a ruler, yard stick,dollar bill, coin, or other item that can be used for measurement/comparison purposes. Get a close up showing growth rings if possible. If no photos are available, check with friends, family or neighbors on the off chance they might have a photo showing your house. Scenes of heavy snow, fall colors or the arrival of out of town friends or family often take place outside and may have your house in the background.

Get documentation from tree trimming or clean-up crews as to how many, the size of trees and volume of debris removed from your property. Check for damage to roof, sheds, underground sprinkler systems or your yard caused by the actual trees, or the removal process. Document as much as you can with a bill from your lawn sprinkler company, landscaper, bills for new sod, etc. While not all may be required for an appraisal, the more information that you can have available, the better, and be sure to provide an additional copy to your tax preparer.

Disclaimer: I am not a tax professional.  This information is believed to be reliable, but has been gathered from a variety of sources that are deemed reliable but are subject to change.  This information is provided solely as a starting place for discussion with your Tax Professional or Attorney.  You should not rely on any presentation made here but should verify the information with a Tax Professional and qualified Appraiser.  



This was prepared originally in 2006, and reviewed in 2017. 

As of this update, August 2020, the 2006 version was updated in 2012 and appears to be most current publication:   

IRS Publication 2194 Disaster Recovery Guide for Individuals and Businesses


The IRS has made available their Publication Form 2194  Disaster Recovery Guide for Individuals and Businesses p2194.pdf that was available at the time of this writing at the IRS website at https://www.irs.gov/pub/irs-pdf/p2194.pdf.  Note: At this writing, the link now goes to the updated (July 2018) publication. 

According to the IRS "If you were affected this year by a major disaster or emergency in your area, this Disaster Losses Kit can help you claim unreimbursed casualty losses on property that was destroyed by a natural disaster. (P. 3 paragraph 1)"

The same publication, on page 12, quotes Page 2 of the IRS Publication 584 (Rev. Dec. 2005) Casualty, Disaster, and Theft Workbook:

Amount of loss.

You figure the amount of your loss using the following steps.

1. Determine your cost or other basis in the property before the casualty or theft.

2. Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. (The decrease in FMV is the difference between the property’s value immediately before and immediately after the casualty or theft.)

3. From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. Apply the deduction limits, discussed later, to determine the amount of your deductible loss. Cost or other basis. Cost or other basis usually means original cost plus improvements.

If you did not acquire the property by purchasing it, your basis is determined as discussed in Publication 551, Basis of Assets. Fair market value. Fair market value is the price for which you could sell your property to a willing buyer, when neither of you has to sell or buy and both of you know all the relevant facts.

When filling out Schedules 1 through 20, you need to know the fair market value of the property immediately before and immediately after the disaster, casualty, or theft. Separate computations. Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. Then combine the losses to determine the total loss from that casualty or theft.

Exception for personal-use real property. In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. Figure the loss using the smaller of the following. • The decrease in FMV of the entire property, only in the tax year in which the casualty or disaster occurred. You can generally deduct a theft loss only in the year you discovered your property was stolen. However, you can choose to deduct disaster area losses on your return for the year immediately before the year of the disaster if the President has declared your area a federal disaster area. For details, see Disaster Area Losses in Publication 547.

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SUDDEN LOSS:
In order to take a deduction for a loss, the loss must be sudden, however, according to Wikipedia, as published 4-7-2017 there are exceptions.  Wikipedia notes:

Revenue Ruling 79-174
Loss from the death of trees by an attack of insects is a casualty loss within the meaning of Internal Revenue Code Section 165(c) (3).  In this case, the taxpayer owned a residential lot upon which 40 ornamental pine trees grew. The trees were healthy on July 1, 1976. By July 10, 1976, all of the trees were dead from an attack by the southern pine beetle.

According to the court, the attack was sudden because it was “of a swift and precipitous nature and not gradual or progressive.” Whether or not an event is sudden is determined by the surrounding facts and circumstances. Since the trees were killed in only ten days, the court determined the attack was sudden.

The attack, in this case, in addition to being sudden, was also unusual and unexpected because there were previously no known attacks of southern pine beetles in the area of the taxpayer’s trees.

Carpenter v. Commissioner
An event does not need to be an act of nature in order for it to be deemed a casualty loss. In Carpenter v. Commissioner, the taxpayer accidentally dropped a diamond ring down the garbage disposal. The United States Tax Court ruled that the accidental destruction of the diamond ring was a casualty loss and, therefore, deductible.

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© 2008 Gary Scott
Updated 2017, 2019 and 2020
(but be sure to visit the IRS website for the most current information)