Discussion:Private Investigator Fees for casualty/theft loss claim???

His client had his condo down in Florida cleaned out by a moving van and professional thieves.

He had to hire a private investigator to track down the loot that was discovered stored in a warehouse under lock and key. The police would not or could not go in without any evidence, so the private eye "broke the case" for his client to recover some of his lost possessions.

Many possessions were not recovered, so he has a theft loss to claim -- what about the private investigator fees? Can those be added to basis of those items that were not recovered? Or are they not deductible no matter what?

Great question I thought.

"Related expenses. The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. However, they may be deductible as business expenses if the damaged or stolen property is business property."

Keeping with the spirit of the ruling, I would have to say no. Additionally in the examples cited, nothing of the kind shows up.

The lost possessions wouldn't be part of the credit nor would any reimbursements from insurance for the unrecovered pieces...but you knew that. I am Captain obvious!

Michael

Thinking of the mortgage world, fees paid for title search and insurance are normal and customary parts of real estate transactions.

Private investigator fees....I dunno. If it were my return, I might try it. For a client who might sue me, nah not worth it.

Michael

You hit an interesting point. However, those type of expenses do not qualify for the casualty deduction for a couple of reasons. One, the expenses did not adjust the basis until after the casualty, making it problematic to claim that adj as part of the loss. Two, the costs were not a qualifying loss caused by a casualty (sudden force major, etc...)

Theft loss is a different case from casualty loss. I'm less certain of pre/post theft line when it comes to adj basis. Judging from the regs, there appears to be the presumption that stolen property is irrecoverable (FMV is zero after the event. also cf 1.165-1(d)). Therefore I'm inclined to argue that the line is drawn when efforts to retrieve the property are abandoned or pointless.

(c) AMOUNT DEDUCTIBLE.

    (1) The amount of loss allowable as a deduction under section 165(a) 
    shall not exceed the amount prescribed by Section 1.1011-1 as the 
    adjusted basis for determining the loss from the sale or other 
    disposition of the property involved. In the case of each such 
    deduction claimed, therefore, the basis of the property must be 
    properly adjusted as prescribed by Section 1.1011-1 for such items as 
    expenditures, receipts, or losses, properly chargeable to capital 
    account, and for such items as depreciation, obsolescence, 
    amortization, and depletion, in order to determine the amount of loss 
    allowable as a deduction. 

For example, the taxpayer sues the theft for recovery, and for this discussion is able to recovery and damages. Are the legal fees and costs deductible? And if deductible, how is the deduction characterized?

As this relates to the original question, can the investigator's fees be deducted? Are such fees capitalized in the basis of the property?

What different, if any, is there between the investigator's fees and the attorney's fees? Are the fees incurred in an attempt to recovery the theft loss?

I'm killing myself for citing an IRS Pub (but it's fast and from memory), but it specifically excludes costs for the restoration from the causing disaster in figuring the current casualty deduction. If your house gets damaged by a hurricane, you rebuild it, and then it gets destroyed in an earthquake, then I you could deduct them as a casualty loss. The thing is that the restoration is adj the basis AFTER the event, so there is no adj basis from BEFORE the event to deduct as a casualty loss.

Otherwise, it just doesn't make that much sense. If my old cruddy house gets blown away, I don't get to deduct the cost of my new fancy house as a casualty deduction.

Assuming we are talking about purely personal use property: "For example, the taxpayer sues the theft for recovery, and for this discussion is able to recovery and damages. Are the legal fees and costs deductible? And if deductible, how is the deduction characterized?" At the very least, always under §212 to the extent that the theft would have produced a loss under §165 had there been no recovery and to the extent the damages are taxable income. If there is recovery, there is no theft loss, so I shan't worry about a pure §165 loss.

"As this relates to the original question, can the investigator's fees be deducted? Are such fees capitalized in the basis of the property?" I'm sure leaning that way.

"What different, if any, is there between the investigator's fees and the attorney's fees? Are the fees incurred in an attempt to recovery the theft loss?" Not sure. I'm sure that it's explicitly listed because it came up in some court case or rev ruling.

The answer to this was not very clear, so I was attempting to show the reason for and how I developed my answer of yes.

Part of the original question, "Or are they not deductible no matter what?" I don't think I answered this question. Apparently, there are some differences between a theft loss and a casualty loss, so I did not answer this question.