Wednesday, Apr. 06, 2011

Intentionally Creating Your Own Losses

Bad things can happen to good people, which is why the IRS allows you to deduct losses relating to the damage, destruction, loss or theft of your property. But what happens when you're responsible for your own losses? Ask Biltmore Blackman, a South Carolina taxpayer who burned down his own home after finding out that his wife had been having an affair. Blackman deducted over $97,000 as a casualty loss on his tax return as a result of the fire. After all, a loss is a loss, right?

Likely consequence: While it's true that mere negligence won't result in the loss of the deduction, gross negligence will. Not surprisingly, in Blackman's case the tax court ruled that since Blackman intentionally set the fire, he was not allowed to deduct the damages. The case is a reminder that engaging in bad behavior — especially when it rises to the level of illegality — won't generally result in a favorable tax deduction. And one more consequence: Blackman was charged with arson.