Ned's office was flooded when a water pipe burst. Office furniture that had been purchased at a cost of $6,000, and on which Ned had deducted $2,000 of depreciation, was damaged by the water. The fair market value of the furniture before being damaged was $5,000, and afterward was $2,000. Ned was reimbursed $2,000 by insurance. Ned's casualty loss deduction is:

$1,000

Explanation:

The casualty loss here can be calculated using the fair value of the asset.

Casualty loss = (Fair Market Value - Insurance received) - Market Value left

Here the fair market value before loss occurrence was $5,000, insurance was $2,000 and the fair market value left was $2000. So by putting the values in the above equation we have:

Casualty loss =  ($5,000 - $2,000) - $2,000 = $1,000

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