Casualty loss is only basis, not fair market value, for tax purposes?

I just want to verify that I have a correct understanding of the IRS position that casualty loss deductions are only the basis of the property lost, not its fair market value.

For example, lets say an old couple has a house for which they paid $20,000 in 1975. The house burns down in 2018 and at that time it has a fair market value of$650,000. The couple can only deduct the $20,000 they paid for the house originally. Is that right? Seems kind of crazy. • Assuming United States, the house since 1975 never had any capital improvements which would alter the basis? See: irs.gov/publications/p523#en_US_2017_publink100010755 – Morrison Chang Jul 1 '18 at 11:56 • I wonder if this works the other way around? Say you buy a new car for$50K, drive it for 10 years after which its fair market value might be $5K. The car is then totalled by an uninsured driver: can you deduct a$50K casualty loss? – jamesqf Jul 1 '18 at 17:45
• Assuming no insurance policy covering, then it'd actually just be a deduction of $19,900,$100 per occurrence is subtracted. – Hart CO Jul 1 '18 at 19:12

If you wonder why that is: If you think the couple should be able to deduct a $650,000 loss from taxes, then they should have paid taxes on$630,000 profit first.
• +1. But this analysis is only fair if a dollar (back when the house was worth $20,000) was worth the same as a dollar now (when the house is worth$650,000). The government has had a policy of making dollars be worth less over time. – Jasper Jul 2 '18 at 3:16