Tax Breaks for Casualty Losses
|By Nicole DeRosa, CPA, MAcc, Senior Tax Manager|
Hurricane Ida has wreaked havoc since it made landfall in Louisiana just this past week and has since caused massive destruction for all things in its path as it traveled up the coast. Between widespread power outages, flooding, fires, and more, the last thing on people’s minds (as it should be) is the tax implications of suffering a casualty loss but it’s important to know that (believe it or not) you could be eligible for a tax break from your loss.
What actually is a casualty loss?
A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event – such as a hurricane. Normal wear and tear or progressive deterioration does not constitute a casualty loss.
Okay, so it appears that I might just have a casualty loss on my hands due to Mother Nature. Are there different classifications or types of casualty losses?
There are ultimately three types of casualty losses:
- Federal casualty losses are an individual’s casualty or theft loss of personal-use property that is attributable to a federally declared disaster area; the loss must occur in a state receiving a federal disaster declaration. If you have a casualty loss from a federally declared disaster area, you can elect to deduct the loss in the tax year immediately before the disaster year, otherwise you can deduct the loss in the year the disaster occurred.
- Disaster losses are losses that are attributable to a federally declared disaster and that occur in an area that is eligible for assistance pursuant to the Presidential declaration. Disaster losses are not limited to individual personal-use property and may be claimed for individual business or income-producing property.
- A qualified disaster loss is an individual’s casualty or theft loss of personal-use property that is attributable to a major federal disaster declared by the President; this was the case for Hurricane Harvey, Irma, and various California wildfires.
So, what factors into my loss and how is it calculated?
First thing is first – you need to figure the amount of your loss by looking back to your starting point and determine your adjusted basis in the property before the casualty or theft occurred.
Next, you’ll want to determine the decrease in fair market value (FMV) of the property because of the casualty or theft that occurred. Taking the smaller of the two (starting point or decrease in FMV), you will then subtract any insurance reimbursements received or reimbursements for which you expect to receive.
After you have figured the amount of your casualty or theft loss, you need to then determine how much is tax-deductible by applying the $100 per casualty and 10% rules (see following example). Report casualty and theft losses on Form 4684; use Section A for personal-use property and Section B for business or income-producing property. For individuals, losses of personal-use property are claimed as an itemized deduction on Schedule A of Form 1040. For qualified disaster losses, you may elect to deduct the loss without itemizing your deductions.
It sounds like I’m definitely going to need a professional to assist me with properly reporting this. Can you break it down in a basic example just so I have a general idea of what we are talking about here?
A hurricane destroyed your car due to extensive flooding; everything inside the car floated away. The loss was $25,000 on the car and $5,000 on the personal property inside the car. Thankfully, your insurance company reimbursed $10,000 for the damage to the car; unfortunately, the property inside the car was not insured so there was no reimbursement for the items that decided to take a swim. In this situation, there are two losses but only one casualty, so we figure the loss as outlined below assuming adjusted gross income for the year of $100,000:
|“Smaller of the two”||$25,000||$5,000|
|Loss after reimbursement||$15,000||$5,000|
|Loss before 10% rule||$19,900|
|Subtract 10% of AGI||$10,000|
|Casualty loss deduction||$9,900|
Wow, I can see how this can get pretty complicated, pretty quickly – especially when there are multiple losses sustained in one event. Is there anything you might advise for this type of situation?
Contact a certified public accountant so you don’t miss out on a potential tax deduction and keep in mind that documentation is key to substantiate your loss. For a casualty, you should be able to prove that you were the owner of the property (or contractually liable if you leased the property), the type of casualty and when it occurred, that the loss was a direct result of the casualty, and whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.