rp-18-08.pdf

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26 CFR 601.105. Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also Part I, §§ 165; 1.165-1(c)(4), 1.165-1(d)(2)(iii), 1.165-7(a)(2), 1.165-7(b), 1.165-
8(c).)

Rev. Proc. 2018-08

CONTENTS
SECTION 1. PURPOSE
SECTION 2. BACKGROUND
SECTION 3. SCOPE
.01 In general
.02 Definition of personal-use residential real property and personal residence
.03 Definition of personal belongings
.04 Taking into account no-cost repairs
.05 Limited use of safe harbor methods

SECTION 4. PERSONAL-USE RESIDENTIAL REAL PROPERTY SAFE HARBOR
METHODS
.01 In general
.02 Estimated Repair Cost Safe Harbor Method
.03 De Minimis Safe Harbor Method
.04 Insurance Safe Harbor Method
.05 Safe harbor methods for Federally declared disasters
(1) Contractor Safe Harbor Method
(2) Disaster Loan Appraisal Safe Harbor Method

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SECTION 5. PERSONAL BELONGINGS SAFE HARBOR METHODS
.01 De Minimis Safe Harbor Method
.02 Safe harbor method for Federally declared disasters
(1) Replacement Cost Safe Harbor Method
(2) Exclusions
(3) Example

SECTION 6. REDUCTION FOR NO-COST REPAIRS
SECTION 7. EFFECTIVE DATE
SECTION 8. PAPERWORK REDUCTION ACT
SECTION 9. DRAFTING INFORMATION

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

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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.
SECTION 2. BACKGROUND
.01 Section 165(a) generally provides that a taxpayer may deduct any loss
sustained during the taxable year and not compensated for by insurance or otherwise.
With respect to property not connected with a trade or business or a transaction entered
into for profit, § 165(c)(3) limits an individual taxpayer’s deduction to losses arising from
fire, storm, shipwreck, or other casualty, or from theft.
.02 Section 165(h) imposes two limitations on casualty and theft loss deductions
for property not connected with a trade or business or transaction entered into for profit.
Section 165(h)(1) provides that any loss to an individual described in § 165(c)(3) shall
be allowed only to the extent that the amount of the loss arising from each casualty, or
from each theft, exceeds $100. Section 165(h)(2) provides that if personal casualty and

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theft losses for any taxable year exceed personal casualty and theft gains for the
taxable year, the losses are allowed only to the extent of the sum of the amount of the
gains, plus so much of the excess as exceeds ten percent of the adjusted gross income
of the individual.
.03 Section 165(h)(4)(E) provides that to the extent an individual’s casualty or
theft loss is covered by insurance, such loss shall be taken into account only if the
individual files a timely insurance claim with respect to such loss.
.04 Section 165(i)(1) allows an individual who suffered a loss occurring in a
disaster area and attributable to a Federally declared disaster to take the loss into
account for the taxable year immediately preceding the taxable year in which the
disaster occurred.
.05 Section 165(i)(4) authorizes the Treasury Department and the IRS to
prescribe guidance under which an appraisal for the purpose of obtaining a loan of
Federal funds or a loan guarantee from the Federal Government as a result of a
Federally declared disaster may be used to establish the amount of any loss described
in § 165(i)(1) or (2).
.06 Section 165(i)(5)(A) defines “Federally declared disaster” as any disaster
subsequently determined by the President of the United States to warrant assistance by
the Federal Government under the Robert T. Stafford Disaster Relief and Emergency
Assistance Act. Section 165(i)(5)(B) defines “disaster area” as the area so determined
to warrant such assistance. For areas with respect to which Federally declared
disasters have been determined, see www.fema.gov/disasters
.

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.07 Section 1.165-1(c)(4) provides that in determining the amount of loss
sustained, adjustments must be made for any insurance or other compensation
received.
.08 Section 1.165-1(d)(2)(iii) provides that if a taxpayer deducted a loss and in a
subsequent taxable year receives reimbursement for such loss, the taxpayer does not
recompute the tax for the taxable year in which the deduction was taken but includes
the amount of such reimbursement in gross income for the taxable year in which
received, subject to the provisions of section 111, relating to recovery of amounts
previously deducted.
.09 Section 1.165-7(b) provides that the amount of a casualty loss is the lesser of
(1) the difference between the fair market value of the property immediately before the
casualty and the fair market value immediately after the casualty, or (2) the adjusted
basis of the property. Section 1012 and § 1.1012-1(a) provide that the basis of property
generally is its cost. Section 1016(a)(1) and § 1.1016-2(a) provide that the basis of
property is adjusted for any expenditure, receipt, loss, or other item, properly
chargeable to capital account, including the cost of improvements and betterments
made to the property.
.10 Section 1.165-7(a)(2)(i) provides that to determine the amount of the
deductible loss under section 165(a), the fair market value of the property immediately
before and immediately after the casualty generally shall be ascertained by competent
appraisal. Section 1.165-7(a)(2)(ii) provides that the cost of repairs to the property
damaged is acceptable as evidence of the decrease in value of the property if the
taxpayer shows that: (1) the repairs are necessary to restore the property to its

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condition immediately before the casualty; (2) the amount spent for such repairs is not
excessive; (3) the repairs do not care for more than the damage suffered; and (4) the
value of the property after the repairs does not, as a result of the repairs, exceed the
value of the property immediately before the casualty. In order 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

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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 procedure provides safe
harbor methods that individuals may use under § 1.165-7(a)(2) to measure the
decrease in the fair market value of their personal-use residential real property following
a casualty and to determine the pre-casualty or theft fair market value of personal
belongings.
The Treasury Department and the IRS also are aware of the unique
circumstances surrounding a Federally declared disaster area and the difficulties
individuals encounter in determining the amount of their losses in those areas.
Accordingly, this revenue procedure provides those individuals with additional safe
harbor methods to use in determining the amount of their casualty and theft losses for
property damaged, destroyed, or stolen as a result of any Federally declared disaster.
SECTION 3. SCOPE
.01 In general. An individual who suffered a casualty loss to the individual’s

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personal-use residential real property may use the safe harbor methods provided in
sections 4.02, 4.03, or 4.04 of this revenue procedure in determining the amount of the
individual’s casualty loss under § 165. An individual who suffered a casualty loss to the
individual’s personal-use residential real property due to a Federally declared disaster
may use any of the safe harbor methods provided in section 4 of this revenue procedure
in determining the amount of the individual’s casualty loss under § 165. An individual
who suffered a casualty or theft loss to the individual’s personal belongings may use the
safe harbor method provided in section 5.01 of this revenue procedure in determining
the amount of the individual’s casualty and theft loss under § 165. An individual who
suffered a casualty or theft loss to the individual’s personal belongings due to a
Federally declared disaster may use either of the safe harbor methods provided in
section 5 of this revenue procedure in determining the amount of the individual’s
casualty and theft loss under § 165.
.02 Definition of personal-use residential real property and personal residence.
For purposes of this revenue procedure, personal-use residential real property is real
property, including improvements (such as buildings and ornamental trees and
shrubbery), that is owned by the individual who suffered a casualty loss and that
contains at least one personal residence. Personal-use residential real property does
not include a personal residence if any part of the personal residence is used as rental
property or contains a home office used in a trade or business or transaction entered
into for profit. For purposes of this revenue procedure, a personal residence is a single
family residence, or a single unit within a contiguous group of attached residential units
(for example, a townhouse or duplex), owned by the individual who suffered a casualty

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loss, and includes any structures attached to the residence or single unit. For purposes
of this revenue procedure, a personal residence does not include a condominium or
cooperative unit, or any other property for which the individual who suffered the casualty
loss does not own the structural components of the building (such as the foundation,
walls, and roof), or owns only a fractional interest in all of the structural components of
the building, or a mobile home or trailer.
.03 Definition of personal belongings. For purposes of this revenue procedure, a
personal belonging is an item of tangible personal property that is owned by the
individual who suffered a casualty or theft loss and that is not used in a trade or
business or in a transaction entered into for profit. For purposes of this revenue
procedure, personal belongings do not include a boat, aircraft, mobile home, trailer, or
vehicle (as defined in section 5.02(2) of this revenue procedure), or an antique or other
asset that maintains or increases its value over time.
.04 Taking into account no-cost repairs. An individual using a safe harbor
method described in this revenue procedure must take into account the value of any no-
cost repairs as described in section 6 of this revenue procedure.
.05 Limited use of safe harbor methods. The safe harbor methods described in
sections 4 and 5 are available only in the circumstances described in this revenue
procedure.
SECTION 4. PERSONAL-USE RESIDENTIAL REAL PROPERTY SAFE HARBOR
METHODS
.01 In general. An individual within the scope of this revenue procedure may use
one of the safe harbor methods described in this section 4. If an individual owns two or
more parcels of personal-use residential real property, the use of a safe harbor method

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for one parcel does not require the individual to use the same safe harbor method, or
any safe harbor method, for any other parcel.
.02 Estimated Repair Cost Safe Harbor Method. Under the Estimated Repair
Cost Safe Harbor Method, to determine the decrease in the fair market value of the
individual’s personal-use residential real property, an individual may use the lesser of
two repair estimates prepared by two separate and independent contractors, licensed or
registered in accordance with State or local regulations. The two repair estimates must
set forth the itemized costs to restore the individual’s personal-use residential real
property to the condition existing immediately prior to the casualty. However, the costs
of any improvements or additions that increase the value of the personal-use residential
real property above its pre-casualty value, such as the cost to elevate the personal
residence to meet new construction requirements, must be excluded from the estimate
for purposes of this safe harbor. The Estimated Repair Cost Safe Harbor Method is
available for casualty losses of $20,000 or less, prior to application of the limitations
under § 165(h).
.03 De Minimis Safe Harbor Method. Under the De Minimis Safe Harbor Method,
to determine the decrease in the fair market value of the individual’s personal-use
residential real property, an individual may estimate the cost of repairs required to
restore the individual’s personal-use residential real property to the condition existing
immediately prior to the casualty. However, the costs of any improvements or additions
that increase the value of the personal-use residential real property above its pre-
casualty value, such as the cost to elevate the personal residence to meet new
construction requirements, must be excluded from the estimate for purposes of this safe

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harbor. An individual’s estimate must be a good-faith estimate, and the individual must
maintain records detailing the methodology used for estimating the loss. The De
Minimis Safe Harbor Method is available for casualty losses of $5,000 or less, prior to
application of the limitations under § 165(h).
.04 Insurance Safe Harbor Method. Under the Insurance Safe Harbor Method, to
determine the decrease in the fair market value of the individual’s personal-use
residential real property, an individual may use the estimated loss determined in reports
prepared by the individual’s homeowners’ or flood insurance company setting forth the
estimated loss the individual sustained as a result of the damage to or destruction of the
individual’s personal-use residential real property.
.05 Safe harbor methods for Federally declared disasters. An individual who
suffered a casualty loss to personal-use residential real property in a disaster area and
due to a Federally declared disaster may use one of the following safe harbor methods
in determining the amount of the individual’s casualty loss under § 165.
(1) Contractor Safe Harbor Method. Under the Contractor Safe Harbor Method,
to determine the decrease in the fair market value of the individual’s personal-use
residential real property, an individual may use the contract price for the repairs
specified in a contract prepared by an independent contractor, licensed or registered in
accordance with State or local regulations, setting forth the itemized costs to restore the
individual’s personal-use residential real property to the condition existing immediately
prior to the Federally declared disaster. However, the costs of any improvements or
additions that increase the value of the personal-use residential real property above its
pre-disaster value, such as the cost to elevate the personal residence to meet new

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construction requirements, must be excluded from the contract price for purposes of this
safe harbor. To use the Contractor Safe Harbor Method, the contract must be a binding
contract signed by the individual and the contractor.
(2) Disaster Loan Appraisal Safe Harbor Method. Under the Disaster Loan
Appraisal Safe Harbor Method, to determine the decrease in fair market value of the
individual’s personal-use residential real property, an individual may use an appraisal
prepared for the purpose of obtaining a loan of Federal funds or a loan guarantee from
the Federal Government setting forth the estimated loss the individual sustained as a
result of the damage to or destruction of the individual’s personal-use residential real
property from a Federally declared disaster.
SECTION 5. PERSONAL BELONGINGS SAFE HARBOR METHODS
.01 De Minimis Safe Harbor Method. Under the De Minimis Safe Harbor Method,
an individual may make a good faith estimate of the decrease in the fair market value of
the individual’s personal belongings. An individual using the De Minimis Safe Harbor
Method must maintain records describing the personal belongings affected and detailing
the methodology used for estimating the loss. The De Minimis Safe Harbor Method is
available for casualty or theft losses of $5,000 or less, prior to application of the
limitations under § 165(h).
.02 Safe harbor method for Federally declared disasters.
(1) Replacement Cost Safe Harbor Method. Except as provided in section
5.02(2) of this revenue procedure, an individual may use the safe harbor method in this
section 5.02(1) to determine the fair market value of the individual’s personal belongings
located in a disaster area immediately before a Federally declared disaster in order to

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compute the amount of a casualty or theft loss. If an individual chooses to use the
Replacement Cost Safe Harbor Method for a Federally declared disaster, the individual
must apply that method to all personal belongings for which a loss is claimed under
§ 165 for that Federally declared disaster, except those specifically excluded in section
5.02(2) of this revenue procedure.
To use this safe harbor method, an individual must first determine the current
cost to replace the personal belonging with a new one and reduce that amount by 10%
for each year the individual owned the personal belonging using the percentages in the
Personal Belongings Valuation Table below. If the personal belonging was owned by
the individual for nine or more years, the pre-disaster fair market value is 10% of the
current replacement cost under this safe harbor method.
Personal Belongings Valuation Table
Year
Percentage of
Replacement Cost to
Use
1 90%
2 80%
3 70%
4 60%
5 50%
6 40%
7 30%
8 20%
9+ 10%

To determine the amount of a casualty or theft loss for personal belongings that
were damaged, destroyed, or stolen:
(a) Determine the decrease in the fair market value of each personal belonging by

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subtracting the fair market value of the personal belonging immediately after the
Federally declared disaster from the fair market value of the personal belonging
immediately before the Federally declared disaster, determined as described above.
If a personal belonging was destroyed or stolen as a result of a Federally declared
disaster, its fair market value after the disaster is zero.
(b) Determine the basis of each personal belonging (generally its cost).
(c) Compare the decrease in fair market value (from step (a)) with the basis of the
personal belonging (from step (b)). From the lesser of the basis or decrease in fair
market value, subtract any insurance or other reimbursements the individual
receives or expects to receive for the personal belonging.
(2) Exclusions. An individual may not use the Replacement Cost Safe Harbor
Method for Federally declared disasters for a boat, aircraft, mobile home, trailer, vehicle,
or an antique or other asset that maintains or increases its value over time. For
purposes of this revenue procedure, a vehicle is an automobile, motorcycle, motor
home, recreational vehicle, sport utility vehicle, off-road vehicle, van, or truck.
An individual may determine the pre-disaster value of a boat, aircraft, mobile
home, trailer, or vehicle by consulting established pricing sources. See Rev. Rul. 2002-
67, 2002-2 C.B. 873; Publication 561, Determining the Value of Donated Property.
(3) Example. An individual’s personal belongings included a couch destroyed by
a hurricane in a Federally declared disaster area. The individual purchased the couch
for $700 four years prior to the hurricane. The cost to replace the couch with a new
couch is $1,000. The couch is not insured.
Using the Replacement Cost Safe Harbor Method for Federally declared disaster
areas, the individual computes the fair market value of the couch immediately before the

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hurricane by multiplying the current replacement cost of the couch, $1,000, by the
applicable percentage of replacement cost from the Personal Belongings Valuation
table, 60%:
$1,000 x 60% = $600
The individual determines the decrease in the fair market value of the couch by
subtracting $0, the fair market value of the couch immediately after the hurricane, from
$600, the fair market value of the couch immediately before the hurricane.
$600 - 0 = $600
The individual compares the basis of $700 with the decrease in fair market value
of $600. Since the decrease in fair market value is less than the basis, the amount of
the individual’s casualty loss is $600.
SECTION 6. REDUCTION FOR NO-COST REPAIRS
Under § 165(a), a casualty loss must be reduced by insurance or other amounts
received, such as amounts given to an individual to repair the damage to the individual’s
property due to the casualty. This includes the value of repairs to, or rebuilding of, the
individual’s personal-use residential real property provided by another party at no cost
to the individual (“no-cost repairs”), such as the repair or rebuilding of an individual’s
personal residence by volunteers. No-cost repairs include repairs made for a de
minimis or token cost, donation, or gratuity.
An individual who uses any safe harbor method provided in this revenue
procedure to determine the decrease in the fair market value of or the amount of loss to
the individual’s personal-use residential real property or personal belongings must
reduce the loss by the value of any no-cost repairs.
SECTION 7. EFFECTIVE DATE

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This revenue procedure is effective December 13, 2017.
SECTION 8. PAPERWORK REDUCTION ACT
The collection of information contained in this revenue procedure has been
reviewed and approved by the Office of Management and Budget in accordance with
the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-0074.
Please refer to the Paperwork Reduction Act statement accompanying Form 1040, U.S.
Individual Income Tax Return, for further information.
SECTION 9. DRAFTING INFORMATION
The principal author of this revenue procedure is Joanna L. Trebat of the Office
of Associate Chief Counsel (Income Tax & Accounting). For further information
regarding this revenue procedure, contact Ms. Trebat at 202-317-7003 (not a toll-free
call).