It is pretty rare to have a casualty loss when insurance is involved. In 12 years, I've had 1 client able to take advantage of a loss. Your adjusted basis is basically what you paid for the home plus improvements & in this case the furnishings would fit in less any depreciation taken for time as a rental, home office or otherwise. In your example, the $70K isn't the relevant, but rather what you originally paid for it. The reduction in FMV is just that (and in your example, the $90K). This would be the loss in FMV before any repairs are done. No matter what your basis is in the property, you couldn't take more than the $90K, so there would be no loss.
Yes, I'm a tax accountant. In that make-believe case, your casualty loss is first limited to the lesser of the (1) actual repair costs or (2) the loss in FMV. So, initially, $70,000 (actual repair costs since your home wasn't a total loss). Then, you factor in insurance. The amount of the insurance proceeds reduces your loss to zero since the amount received exceeded the $70,000. So, like what was already stated in this thread, there would be no casualty loss.
