Please evaluate the facts and write a memo explaining how the loss affects the clients tax return, including the dollar amount of any allowable deduction, and how they should report the loss including any special tax return forms that are required.

Terry and Chris live in a townhome in southwest Austin and experienced quite a bit of property damage in the February 2021 Snovid weather event. Here is a list of the damages that occurred on their property:

1. A branch of a large oak tree fell iced over and fell on Chris Tesla which was parked outside their home. The Tesla originally cost $65,000 and the Tesla service division estimated that it would cost $30,000 to repair the car. Chris insurance company declared the car a total loss and reimbursed the couple $20,000. The Tesla was outside because they were using the garage to store equipment and appliances from Terrys restaurant business that had to close at the end of 2020 due to covid.

2. The townhouse is equipped with an interior sprinkler system in the event of fire. The pipes that run the sprinkler system froze over and burst when their water came back after having been out for five days. The water cascaded out of the ceiling and caused extensive damage to the structure and the furnishings and appliances. Estimated expenses are as follows:

a. Remediation of water damage to walls and ceilings $5,000. Insurance paid $4,000.

b. Estimated fair market value of furniture, personal items, and appliances in need of replacement (based on insurance appraisal) = $80,000, but they originally paid $100,000 for these items. They have a high deductible homeowners insurance policy and were reimbursed $50,000 by the insurance company for these losses.

c. The restaurant equipment was uninsured since the restaurant closed so, to cut costs, Terry terminated the insurance policy. The flooding caused so much damage to the electrical appliances that they are no longer usable. Terry originally paid $80,000 for these items and they had an adjusted basis of $50,000 at the time of the loss (as business property they were depreciated on the couples schedule C).

d. The couple had to move out of their home for three weeks while they had repairs done. They spent $2000 on an Airbnb in central Austin while they while they waited for the repairs. The insurance company did not reimburse them for this cost. They spent $2500 to rent a car while the Tesla was in the shop for a month getting repaired. Their insurance policy did not reimburse this cost.

e. Their AGI for 2020 was $325,000.

f. They estimate that their AGI for 2021 will be $230,000 since Terrys restaurant had to close at the end of 2020.