Question

What policy reason do you think explains why losses on the personal-use property of individuals are nondeductible except for a limited amount of loss from involuntary conversions?

Answer 1

Involuntary conversions are where a personal property is replaced with a new one when the property is destroyed beyond repair either due to damage, theft or confiscation. These are beyond the control of an individual and are unintended in nature. Hence, the policy allow losses incurred on involuntary conversion.

However, the losses on personal property conversion that is voluntary in nature or the gains recognized from involuntary conversion if you do not purchase a new property is not allowed. One rationale that could possibly be behind this policy is that the sale is capital in nature and any losses on the property could have been averted by the individual or possibly could have waited to sell it a gain. The IRS will not allow an individual to deduct losses that have been incurred by an intentional sale.