The first step is to determine the amount of the loss. Generally, you look at the value of the property before and after the loss event. The change in value before and after the event is the number you use for the calculation. (NOTE: This is the Cliff’s Notes version for determining the loss. As with anything relating to taxes, there are exceptions and special circumstances.)
For stolen property, the “after” fair-market value is considered to be $0, so the amount of the loss in our example is $113,000 ($113,000 “before-theft” value minus $0 “after-theft” value).
Next, we reduce the loss by $100. In our example, we are left with $112,900.
Unfortunately, we aren’t finished. The last step is to reduce the remaining loss by 10% of your income. In our example, 10% of $500,000 is $50,000, so we take $112,900 minus $50,000, leaving us with $62,900. This is the amount we can deduct on our tax return as a casualty and theft loss.
As you can see, Step 2 eliminates a deduction for small things. And Step 3 puts further limitations on what you can deduct, because the higher your income is, the greater the reduction in your deduction.
Similar Dinesen Tax Times Article: Deducting Flood Losses and Other Storm Damage.