SECTION 5. EXAMPLES

The following examples illustrate the application of the Cost Indexes Safe Harbor Method described in section 4 of this revenue procedure.

Example 1 . Prior to Hurricane Irma, an individual purchased a personal residence in Florida for $500,000. The personal residence is 2,000 square feet and the personal-use residential real property does not contain any decking or detached structures. The personal residence was flooded for over three weeks, causing the structural connections in the personal residence to corrode to the extent they must be replaced. The personal residence is located in the 2017 Disaster Area. Insurance and other reimburse

January 8, 2018 296 Bulletin No. 2018–2

ments total $100,000. The individual chooses to use the Cost Indexes Safe Harbor Method. Because the corrosion damage to the personal residence falls within the definition of total loss, as defined in section 3.03(1) of this revenue procedure, the individual uses Table 1 of the Cost Indexes Safe Harbor Method to determine the decrease in fair market value of the personal-use residential real property. The individual multiplies the square footage of the personal residence by the cost index for a Medium Personal Residence in Florida in Table 1, as follows:

2,000 sq. ft. - $208/sq. ft. - $416,000

The individual compares the decrease in fair market value, $416,000, with the basis in the personal-use residential real property, $500,000, and from the smaller of these two amounts, $416,000, subtracts the insurance and other reimbursements of $100,000. The amount of the individual’s casualty loss is $316,000 ($416,000 - $100,000).

Example 2. Assume the same facts in Example 1, except that the individual purchased the personal-use residential real property twenty years ago for $120,000 and paid no additional amounts for improvements or remodeling. The individual compares the decrease in fair market value, calculated using the Cost Indexes Safe Harbor Method in Example 1, with the basis of the personal-use residential real property. Since the basis of $120,000 is less than the decrease in fair market value, $416,000, the individual’s casualty loss is limited to the basis of $120,000. After subtracting insurance and other reimbursements of $100,000 from the basis of $120,000, the amount of the individual’s casualty loss is $20,000 ($120,000 - $100,000 - $20,000).

Example 3 . An individual’s personal residence in Puerto Rico is substantially damaged by a storm surge from Hurricane Maria. The individual is not a bona fide resident of Puerto Rico. The individual’s personal-use residential real property is located in the 2017 Disaster Area. The damage falls within the definition of near total loss, as defined in section 3.03(2) of this revenue procedure, since all of the drywall, floorings, electrical lines, ducts, plumbing, and other fixtures need to be replaced. Prior to Hurricane Maria, the individual purchased the personaluse residential real property for $190,000 and spent $10,000 for improvements to remodel the residence. Immediately prior to Hurricane Maria, the adjusted basis of the property was $200,000 ($190,000 cost � $10,000 improvements). The personal residence is 2,000 square feet and the personal-use residential real property does not contain any decking or detached structures. The individual paid $5,000 to have debris cleared from the personal-use residential real property. Insurance and other reimbursements total $100,000.

Because the damage to the personal residence falls within the definition of near total loss, the individual uses Table 2 of the Cost Indexes Safe Harbor Method to determine the decrease in fair market value of the personal-use residential real property. Using Table 2 of the Cost Indexes Safe Harbor Method, the decrease in fair market value of the personal-use residential real property is determined by multiplying the square footage of the personal residence by the cost index for a Medium Personal Residence in Puerto Rico as follows:

2,000 sq. ft. - $158/sq. ft. - $316,000

Because the individual chooses to use the Cost Indexes Safe Harbor Method for determining the decrease in fair market value, the $5,000 debris removal costs are not added to the safe harbor amount of $316,000. The individual compares the adjusted basis of the personal-use residential real property to the decrease in fair market value determined by using the Cost Indexes Safe Harbor Method. Since the adjusted basis of $200,000 is less than the decrease in fair market value, $316,000, the individual’s casualty loss is limited to the adjusted basis of $200,000. After subtracting $100,000, the amount of insurance and other reimbursements received, from the adjusted basis of $200,000, the amount of the individual’s casualty loss is $100,000 ($200,000 - $100,000 - $100,000).

Example 4. The first floor of an individual’s personal residence in Texas was flooded with 3 feet of water during Hurricane Harvey. As a result of the flooding, all of the flooring and drywall on the first floor needs to be replaced. The second floor of the personal residence is not damaged. While the personal residence sustained flooding of more than 1 foot, it did not sustain damage that falls within the definition of total loss or near total loss in sections 3.03(1) and (2) of this revenue procedure. Therefore, the personal residence sustained interior flooding over 1 foot as described in section 3.03(3) of this revenue procedure. In addition, the deck attached to the personal residence was completely destroyed by Hurricane Harvey. The personal-use residential real property is located in the 2017 Disaster Area. The personal residence is 2,000 square feet and the personal-use residential real property does not contain any detached structures. The total square footage of the flooded rooms on the first floor is 1,000 square feet. Prior to Hurricane Harvey, the individual purchased the personal-use residential real property for $200,000. Insurance and other reimbursements total $90,000. The individual chooses to use the Cost Indexes Safe Harbor Method.

To calculate the decrease in fair market value of the personal-use residential real property, the individual uses the first column of Table 3 to determine the size of the personal residence based on the total square footage of the personal residence. The individual multiplies the flooded square footage of the personal residence, 1,000 square feet, by $117, the cost index for a Medium Personal Residence in Texas, in Table 3.

1,000 sq. ft. - $117/sq. ft. - $117,000

The deck is 200 square feet. Using Table 7, the individual multiplies the square footage of the damaged area of the deck, 200 square feet, by the cost index of $27 for Texas in Table 7.

200 sq. ft. - $27/sq. ft. - $5,400

To determine the total decrease in fair market value of the personal-use residential real property the individual adds $5,400 to $117,000.

$5,400 - $117,000 - $122,400

The individual then compares the basis of the personal-use residential real property, $200,000, to the decrease in fair market value determined by using the Cost Indexes Safe Harbor Method, $122,400. Since the decrease in fair market value

of $122,400 is less than the basis of $200,000, the individual’s casualty loss is limited to $122,400. After subtracting $90,000, the amount of insurance and other reimbursements, from $122,400, the amount of the individual’s casualty loss is $32,400 ($122,400 � $90,000 � $32,400).

Example 5. Prior to Hurricane Irma, an individual purchased personal-use residential real property for $200,000 in Georgia and spent $5,000 for improvements to the personal-use residential real property. Two trees fell onto the individual’s personal residence during Hurricane Irma, destroying a portion of the roof. Rain from the hurricane soaked the walls and flooring of two bedrooms and the living room, necessitating removal and replacement of drywall and wood paneling, roof panels, trusses, and flooring. The rest of the personal residence remains undamaged. The personal residence was not flooded. Therefore, the damage constitutes structural damage from wind, rain, or debris, as described in section 3.03(4) of this revenue procedure. The individual’s personal-use residential real property is located in the 2017 Disaster Area. The personal residence is 2,000 square feet and the personal-use residential real property does not contain any decking or detached structures. The damaged two bedrooms and living room total 1,000 square feet. Insurance and other reimbursements total $100,000.

The individual chooses to use the Cost Indexes Safe Harbor Method. Using Table 4, the percentage of square footage of the personal residence that was damaged by the hurricane is determined by dividing the total square footage of the personal residence by the square footage of the personal residence that was damaged as follows:

1,000 sq. ft./2,000 sq. ft. - 0.50 or 50% of the total square footage was damaged. The individual uses the cost index in the column for Georgia of Table 4 for 26% to 50% damage and multiplies it by the number of square feet that were damaged.

$174/sq. ft. - 1,000 sq. ft. - $174,000

The roof covering also sustained damage that necessitated replacement of all roof shingles, felt lining, and flashings. The total square footage of the ground floor of the personal residence is 2,000 square feet. The total square footage under the roof, including porches, patios, and overhangs, is 2,200 square feet. The individual multiplies the cost index for a Medium Personal Residence in Georgia in Table 5 by 2,200 square feet, the total square footage under the roof.

2,200 sq. ft.� $8/sq. ft. - $17,600

The individual adds $17,600 to $174,000 to determine the total decrease in fair market value of the personal-use residential real property.

$17,600 - $174,000 - $191,600

The individual compares the decrease in fair market value, $191,600, with the adjusted basis, $205,000, and from the smaller of these two amounts, $191,600, subtracts insurance and other reimbursements of $100,000. The amount of the individual’s casualty loss is $91,600 ($191,600 $100,000 - $91,600).

Example 6. Winds from Hurricane Maria caused a tree to fall across a detached garage located on an individual’s personal-use residential real property in the U.S. Virgin Islands. The individual is not a bona

Bulletin No. 2018–2 297 January 8, 2018

fide resident of the U.S. Virgin Islands. Prior to Hurricane Maria, the individual purchased the personal-use residential real property for $200,000. The personal residence is located in the 2017 Disaster Area. The personal residence is not damaged by Hurricane Maria. The personal-use residential real property does not contain any decking or other detached structures. The garage suffered significant damage and requires major rebuilding. The total square footage of the garage is 400 square feet. The garage was not insured.

The individual chooses to use the Cost Indexes Safe Harbor Method. Because the garage is a detached structure, as described in section 3.03(6) of this revenue procedure, the individual uses Table 6 to determine the decrease in fair market value of the personal-use residential real property. Using Table 6, the individual multiplies the total square footage of the garage, 400 square feet, by the cost index of $64 in the column for the U.S. Virgin Islands of Table 6.

400 sq. ft. - $64/sq. ft. - $25,600

The individual’s basis in the personal-use residential real property is $200,000. The individual compares the decrease in fair market value, $25,600, with the basis, $200,000. Since the decrease in fair market value is less than the basis, the amount of the individual’s casualty loss is $25,600.

Example 7. Winds from Tropical Storm Harvey blew down a pine tree that destroyed part of a deck attached to the back of an individual’s personal residence in Louisiana. The personal-use residential real property is located in the 2017 Disaster Area. The individual’s basis in the personal-use residential real property is $200,000. Neither the personal residence nor any detached structure was damaged by the fallen tree. The deck is 450 square feet. It is necessary to rebuild one-half of the deck. The remaining half of the deck is not damaged and remains structurally sound.

The individual chooses to use the Cost Indexes Safe Harbor Method for the damage described in section 3.03(7) of this revenue procedure and uses Table 7 to determine the decrease in fair market value of the personal-use residential real property.

The square footage of the damaged area of the deck is one-half of 450 square feet, which is 225

square feet. Using Table 7, the individual multiplies the square footage of the damaged area of the deck, 225 square feet, by the cost index of $27 in the column for Louisiana in Table 7.

225 sq. ft. - $27/sq. ft. - $6,075

The individual compares the decrease in fair market value, $6,075, with the basis, $200,000. Since the decrease in fair market value is less than the basis, the amount of the individual’s casualty loss is $6,075.