You or your family, friends or neighbors may have sustained damage to your homes from Hurricane Ian, which is known as a “casualty” event. The cost of repairing or replacing aspects of your home such as roofs, trees or shrubs can come into play on your tax return as casualty loss deductions. But it’s not as simple as just deducting the replacement or repair costs and there are many confusing details about how to determine your loss.
Most of the following information pertains to casualty losses due to a Federally declared disaster like Ian. And in this post, I am only addressing casualty losses to residential property. These issues are somewhat different for business properties, where, for example, the land and any buildings on it are considered as separate entities.
Change in Fair Market Value
In general, the amount of casualty loss you can deduct is equal to the fair market value of your property immediately before the casualty, reduced by the fair market value after the casualty – minus whatever you received as compensation from the insurance company. So, say your home was worth $300,000 before Ian and only $280,000 afterwards, and the insurance company gives you $15,000 – your possible casualty loss is the difference, $5,000.
One way of determining the loss of fair market value from a casualty event is through an appraisal. Unfortunately, the property is treated as a whole and the change in appraised value may not reflect the loss, for example, of your favorite oak tree. Improvements to the property like your garden and other outdoor features are considered integral parts of the property and are not considered separately.
Cost of Repairs or Replacement
A more common way of determining the casualty loss is basing it on the cost of repairs or replacement. So, if a tree came down on your garden shed and the shed costs $3,200 to rebuild or replace, your casualty loss for the shed is $3,200 – minus anything paid by your insurance. Likewise, the cost of removing the fallen tree and replacing it could be part of the casualty loss.
Keep in mind, to be deductible, repairs must actually be done, not be excessive, be necessary to bring the property back to its state before the casualty event, and not cause the property to be worth more than before.
When to Take the Casualty Loss
It may take months for the insurance company to tell you what they are paying you. So, the casualty loss deduction can be taken either in the tax year when you determine your loss, or in the preceding tax year. Sometimes this means that an Amended tax return should be filed to add your casualty loss deduction in the previous year. The IRS does require you to file “a timely insurance claim” if your loss is covered. The year you claim the deduction is known as the “disaster year.”
Casualty losses are reported on IRS Form 4684, Casualties and Thefts. But if the loss is NOT attributable to a federally declared disaster, the loss is taken on Schedule A as an Itemized Deduction. Your accountant will know to include the FEMA declaration number (DR-4673-FL for Hurricane Ian) on any return claiming a loss.
The maximum possible casualty loss is limited to the Adjusted Basis of the property, which can be determined by your tax accountant. And unfortunately for those who endured substantial damage or even total loss of their homes, the casualty loss is limited to 10% of your Adjusted Gross Income.
Disaster Assistance Payments
On the bright side, disaster victims generally do not to have to pay income tax on assistance payments they receive. Taxpayers in a Federally declared disaster area who receive grants from state programs, charitable organizations or employers to cover medical, transportation or temporary housing expenses do not have to include these grants in their income.
An exception is payments received for replacements for lost or destroyed property. In calculating your casualty loss, if the payment is for replacement of lost or destroyed property, then you would subtract that payment amount in figuring your casualty loss.
I hope this has given you a place to start in assessing a possible casualty loss. As always, your tax accountant is the best resource to determine the way forward and the many details that come into play.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
