Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-91

1970-1 C.B. 37

Sec. 165

IRS Headnote

Rust and water damage to rugs, carpets, and drapes caused by the bursting of a water heater qualifies as a casualty loss under section 165(c)(3) of the Code, but damage to the water heater itself does not qualify.

Full Text

Rev. Rul. 70-91

A taxpayer suffered rust and water damage to his rugs, carpets, and drapes when the water heater in his one-story dwelling burst from normal deterioration (rust and corrosion) over a period of time and flooded a portion of the house with water. The taxpayer had no insurance to reimburse him for these losses.

Held, since the rust and corrosion of the water heater itself was gradual and progressive, its loss is not a casualty within the meaning of section 165(c)(3) of the Internal Revenue Code of 1954.

Held further, the rust and water damage to the rugs, carpets, and drapes caused by the bursting of the water heater was the result of an identifiable event, sudden in nature, fixing a point at which the loss to the damaged property can be measured, and was also unexpected or unusual in the context in which the damage occurred. Therefore, such damage is a casualty within the meaning of section 165(c)(3) of the Code, and the taxpayer is entitled to a nonbusiness casualty loss deduction. The amount of the damage is the lesser of either (1) the difference between the fair market value of the property immediately before and immediately after the casualty, or (2) the adjusted basis of the property. That amount reduced by $100 is allowable as a casualty loss deduction.