SECTION 1. PURPOSE

.01 This revenue procedure provides safe harbor methods that individual taxpayers may use in determining the amount of their casualty and theft losses pursuant to § 165 of the Internal Revenue Code for their personal-use residential real property (as defined in section 3.02 of this revenue procedure) and personal belongings (as defined in section 3.03 of this revenue procedure). This revenue procedure provides additional safe harbor methods that may be used in the case of casualty and theft losses occurring as a result of any Federally declared disaster (as defined in section 2.06 of this revenue procedure).

.02 The Internal Revenue Service (IRS) will not challenge an individual’s determination of the decrease in fair market value of personal-use residential real property if the individual qualifies for and uses one of the safe harbor methods described in section 4 of this revenue procedure. The IRS will not challenge an individual’s determination of the decrease in fair market value of personal belongings if the individual qualifies for and uses one of the safe harbor methods described in section 5 of this revenue procedure.

.03 If an individual uses a safe harbor method described in this revenue procedure, the individual also must take into account the value of any no-cost repairs as

described in section 6 of this revenue procedure.

.04 Use of a safe harbor method described in this revenue procedure is not mandatory. An individual may, instead, use the actual reduction in the fair market value of personal-use residential real property or personal belongings, pursuant to § 1.165–7(a)(2) of the Income Tax Regulations, if the individual has proper substantiation.

.05 The safe harbor methods provided in this revenue procedure apply only to the circumstances within the scope of this revenue procedure and may not be used in any other circumstances.

January 8, 2018 286 Bulletin No. 2018–2

to use the cost-of-repairs method to determine the decrease in fair market value, the taxpayer must actually make the repairs rather than rely on estimates of repairs that will be performed in the future or not at all. See Lamphere v. Commissioner, 70 T.C. 391, 396 (1978), acq., 1978–2 C.B. 2; Farber v. Commissioner, 57 T.C. 714, 719 (1972), acq., 1972–2 C.B. 2. .11 Section 1.165–8(c) provides that the amount deductible in the case of a theft loss is determined consistently with the manner described in § 1.165–7 for determining the amount of a casualty loss. The fair market value of the property immediately after the theft is considered to be zero.

.12 Section 1.165–7(b)(2)(ii) provides that in determining a casualty loss involving real property and improvements thereon not used in a trade or business or in any transaction entered into for profit, the improvements (such as buildings and ornamental trees and shrubbery) to the property damaged or destroyed are considered an integral part of the property, and no separate basis need be apportioned to the improvements.

.13 Following certain disasters, Congress may modify the rules of § 165 as applied to casualty and theft losses occurring in a specified disaster area. For example, § 504(b) of the Disaster Tax Relief and Airport and Airway Extension Act of 2017, Pub. L. No. 115–63, 131 Stat. 1168, 1182–1183 (Sept. 29, 2017), modifies the § 165(h) loss limitations and other provisions of § 165 as applied to casualty and theft losses occurring in certain areas affected by Hurricanes Harvey, Irma, and Maria.

.14 Taxpayers report gains and losses from casualties and theft on Form 4684 according to the Form 4684 instructions, as updated at www.irs.gov/form4684 . See special instructions at www.irs.gov/form4684 for taxpayers electing under § 165(i) to report their casualty and theft losses calculated under this revenue procedure on an original or amended 2016 tax return.

.15 The Treasury Department and the IRS are aware that taxpayers often have difficulty determining the amount of their losses under the methods provided in § 1.165–7(a)(2), which has resulted in time-consuming and expensive litigation. In order to provide certainty to both taxpayers and the IRS, this revenue proce