Understanding Casualty Loss In The Wake Of Hurricane Irma

*** Please note – Since publishing this article, Congress made changes on how to calculate your losses if you were impacted by the recent hurricanes. Therefore, the example below is no longer accurate. Please contact your De Boer, Baumann tax advisor to discuss your specific circumstances.

Hurricane Irma arrived in Florida on September 10th, causing widespread damage and prompting the President to make a disaster declaration for the state. In the wake of the storm, as property owners begin the process of recovering, many are wondering if and how to claim their losses due to damage they sustained, either to personal or business property, on their taxes.

The term to be aware of in this situation is “casualty loss,” which the IRS defines as a loss that results from “the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption.”

For comprehensive information on calculating the amount of your casualty loss, whether for personal-use property or business/income-producing property, see the IRS’ Topic 515 – Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas). A few key points from the article include:

• While casualty losses are generally deducted in the year that the casualty occurred, in the case of a federally declared disaster that occurred in an area warranting assistance, you have the option of treating the casualty loss as having occurred in the preceding tax year.
• Your casualty loss deduction must be reduced by the salvage value of your property, as well as by any insurance reimbursement received.
• Casualty losses should be reported on Form 4684, Casualties and Thefts (Section A for personal-use property, Section B for business or income-producing property) and claimed as an itemized deduction on Form 1040, Schedule A.
• In the case of your loss deduction exceeding your income, you may have a net operating loss—refer to Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.

Reconstructing records is a key step for those facing property damage as a result of Hurricane Irma. For tax records, the IRS offers a free return transcript tool called Get Transcript, and also expedites processing and waives the normal user fees for those who prefer to request their transcripts by phone or mail. For a comprehensive list of what other records to pursue, and tips on doing so, visit the IRS’ Reconstructing Records After a Natural Disaster or Casualty Loss page.

Calendar-year partnerships should keep in mind that the extension due date for filing a partnership tax return is September 15th. That being said, the IRS did provide relief to taxpayers affected by Hurricane Harvey and is expected to offer similar relief for those affected by Hurricane Irma, as well.

In addition to the technical links mentioned above, the following are hints on things you may want to do. Remember every situation is different.

Wind damage, water damage, car, building, personal residence, second home, condo rental or business.

1. Be safe – there are still problems with downed electrical wires and clogged roads.
2. Contact your various insurance agents, as soon as possible.

Car insurance, flood insurance, homeowners insurance

1. To prepare for an inspection –
   • Shoot photos and videos of the outside and inside of your home or business and label them by room, before you remove any items. Don’t forget to take photos of the back of appliances and major items, such as TVs and computers, in order to have the serial number, make, and model. If you have a total loss, save pictures that were taken prior to loss.
   • Throw away items that are potential health risk, such as saturated cushions or perishable food items
   • Don’t overlook the carpet, drapes and wallpaper if they are damaged by the flood. Save portions of them for inspection.
   • If your HVAC, water, or electrical systems are damaged, contact a cleaning, remediation or maintenance service, but have a consultation with the adjuster before signing a contract or agreement for the work.
2. Estimating your loss-
   • First, you have to calculate how much casualty loss you have. Your casualty loss for tax purposes may be different from the dollar amount of damage done. For tax purposes, your casualty loss is the lesser of:
     • Your basis (contribution) in the property
     • The change in fair market value caused by the casualty event
3. Deductions for personal losses-
   • In theory, the federal income tax rules allow you to claim an itemized deduction for personal casualty losses that are not covered by insurance.
   • In reality, however many disaster victims don’t qualify for personal casualty loss write-offs because of the following two rules.
     • You must reduce your loss by $100. No big deal.
     • You must further reduce the loss by an amount equal to 10% of your adjusted gross income (AGI) for the year. AGI is the number at the bottom of page 1 of your From 1040. For example:
       • Say you incur a $40,000 personal casualty loss after the insurance recover, from one of this year’s disasters and have AGI of $150,000. Your write-off will be only $24,900 ($40,000-$100-$15,000). You get absolutely no tax break if your loss before the two required subtractions is $15,100 or less, and you have no chance for a deduction unless you itemize.
       • But let’s assume you do have a deductible personal casualty loss from a 2017 event after the two subtractions. If the loss was caused by a disaster in a federally declared disaster area, a special rule allows you to claim your rightful deduction on either your return for 2017 (the year the casualty event occurred) or on an original or amended return for 2016 (the year before the casualty event). In effect, this beneficial rule allows you to claim the deduction in the year when it does you the most tax-saving good.

The De Boer, Baumann & Company, P.L.C. team extends its deepest sympathies to everyone affected by Hurricane Irma. We encourage you to reach out to your De Boer, Baumann & Company, P.L.C. advisor with any and all queries you might have as to how to undertake this step of recovery from the recent disaster.

** The content and comments contained in this article should not be considered tax advice. Before you make decisions on claiming your losses, please contact a De Boer, Baumann professional.