Expert insights and step-by-step advice on how to claim a casualty loss after unexpected disasters.
The aftermath of unexpected natural disasters can be devastating in many ways, impacting individuals, families and communities for years to come. While recovery efforts can take quite a bit of time, there are some immediate steps affected families can take now to try to recover their economic losses. This includes claiming a casualty loss deduction on their federal income tax return.
At The Mather Group, we want to make sure those who need to utilize this tax relief option have all the resources and information they need—including a step-by-step guide on calculating the loss, where and how to deduct, and what documentation you’ll need to provide to your tax preparer.
WHAT 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 flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration.
Use the step-by-step guide below to navigate the casualty loss claim process. If you see a word in bold, check the “Terms to Know” on Page 3 for a deeper dive into the topic.
STEP ONE: GATHER REQUIRED DOCUMENTATION
To deduct a casualty loss, you must be able to support the deduction amount and provide information on the type of casualty, when it occurred, proof the loss was a direct result of the casualty, proof you were the owner of the property (or if you leased the property, you were contractually liable to the owner for damage) and whether a reimbursement claim exists with reasonable expectation of recovery. You’ll also need to provide your tax preparer with the following information for each item of personal property that was damaged:- The adjusted basis of the property (e.g., receipts from improvements)
- The fair market value (FMV) of the property before the casualty occurred (e.g., appraisal report)
- The FMV of the property after the casualty occurred (e.g., appraisal report)
- The amount of insurance or other reimbursement received
LOST YOUR RECORDS?
If the documentation and records you need were destroyed or lost, you may have to reconstruct them. Information about reconstructing records is available at IRS.gov. Type “reconstructing your records” in the search box, or see Pub. 2194, the Disaster Resource Guide.
STEP TWO: CALCULATE THE LOSS
To deduct a casualty loss relating to your home, household items and vehicles, you must first calculate the economic loss from the casualty or theft. Generally speaking, losses should be figured separately for each personal property item damaged or destroyed. However, in figuring a loss to personal-use real estate you own, all improvements (such as buildings, trees and the land containing the improvements) are considered together. Here’s how to calculate the loss:- Determine your adjusted basis in the property before the casualty or theft.
- Determine the decrease in FMV of the property as a result of the casualty or theft. An appraisal of the property may be required. See Page 3 for more information on the appraisal process.
- The amount of your loss is the lesser of your adjusted basis or the decrease in FMV of your property because of the damage. From that smaller amount, subtract any insurance or other reimbursements you received or expect to receive.
- Combine the separate property losses to figure the total loss. Then, reduce the total loss by the sum of $100 plus 10% of your adjusted gross income (AGI).
STEP THREE: KNOW WHEN & WHERE TO DEDUCT
Casualty losses typically should be deducted in the year the casualty occurs. However, in the case of a federally-declared disaster, you do have the option to treat the casualty loss as having occurred in the prior year by filing an amended tax return for that year. To claim a casualty loss on your federal income tax return, you must itemize your deductions using Form 1040, Schedule A, Itemized Deductions.
ADJUSTED BASIS
Adjusted basis is a measure of your investment in the property. For property you purchase, your basis is generally its purchase price. However, certain events may have happened during the time you owned the property that will result in increases or decreases to the purchase price to determine the adjusted basis. Examples of events that would increase the basis above the purchase price would be additions or permanent improvements. Examples of events that would decrease the adjusted basis would be earlier casualty losses and depreciation deductions. It will be necessary that you locate and retain documentation (i.e., receipts) proving your adjusted basis in the property.
FAIR MARKET VALUE
Fair market value (FMV) is the price you could sell your property to a willing buyer, assuming neither of you has to sell nor buy and both of you know all the relevant facts. The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's FMV immediately before and immediately after the casualty or theft.
To figure the decrease in FMV because of a casualty, you generally need a competent appraisal. An appraisal to determine the difference between the FMV of the property immediately before a casualty and immediately afterwards should be made by a competent appraiser. The appraiser must recognize the effects of any general market decline that may occur along with the casualty. This information is needed to limit any deduction to the actual loss resulting from damage to the property.
INSURANCE AND OTHER REIMBURSEMENTS
If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. You do not have a casualty or theft loss to the extent you are reimbursed.
If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. You must reduce your loss even if you do not receive payment until a later tax year.
If your property is a business or income-producing property (such as rental property) and is completely destroyed, the amount of your loss is your adjusted basis.
PERSONAL PROPERTY
Personal property is any property that is not real property. If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property.
Make sure you’re aware of costs that are not considered part of a casualty loss, as well as exclusions on deductions.
PROPERTY COVERED BY INSURANCE
You may not deduct casualty losses for property covered by insurance, unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement. However, if the amount of the loss on the insured property is equal to or less than your deductible you are not required to file a claim to deduct the loss.INSURANCE PAYMENTS FOR LIVING EXPENSES
You do not reduce your casualty loss by insurance payments you receive to cover living expenses if you lose the use of your main home because of a casualty, or if government authorities do not allow access to your main home because of a casualty or threat of one.CLEAN-UP & REPAIR COSTS
Costs associated with repairing damaged property or cleaning up after a casualty are not considered part of a casualty loss. You can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions:- The repairs are actually made
- The repairs are necessary to bring the property back to its condition before the casualty
- The amount spent for repairs is not excessive
- The repairs take care of the damage only
- The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty
NEED MORE HELP?
Contact The Mather Group for a complimentary tax analysis based on your specific situation to see if you qualify for a casualty loss claim.The opinions and advise expressed in this communication are based on The Mather Group’s research and professional experience and are expressed as of the publishing date of this communication. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. The Mather Group makes no warranty or representation, express or implied, nor does The Mather Group accept any liability, with respect to the information and data set forth herein. The Mather Group specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice.
