Oregon Tax Consultants Practice Exam

When can losses from personal use assets be recognized?

1. When sold for a profit

2. When they are gifted

3. When there is a casualty or theft loss

4. Upon depreciation of the asset

The correct answer is: When there is a casualty or theft loss

Losses from personal use assets can be recognized in the event of a casualty or theft loss. This is because tax regulations explicitly allow for the deduction of losses incurred from these specific circumstances, as they affect the asset's value. A casualty loss can occur due to sudden and unexpected events, such as natural disasters, accidents, or theft, which result in a financial loss to the owner. In other scenarios, such as selling an asset, gifting it, or its decline in value from depreciation, losses typically cannot be recognized for tax purposes. For instance, if an asset is sold for a profit, the gain is taxable, and losses on personal use assets that are sold for less than their cost are not deductible under current tax law. Similarly, when assets are gifted, the recipient takes the asset at the donor's basis, and any potential loss is not realized until a sale occurs at a loss. Depreciation relates to business or investment assets, not personal use assets, and losses on such depreciation aren't recognized either. Thus, the recognition of losses exclusively arises from the circumstances surrounding a casualty or theft, making this option the only situation where a loss on personal use assets is permitted under tax law.