Hurricane Harvey Tax Update
As the victims of Hurricane Harvey continue to put their lives back together, an area of concern is casualty losses. In this communication we discuss:
- the definition of a casualty loss,
- the loss calculation,
- the loss limitations, and
- the loss deduction
Next week we will examine casualty loss relative to your business.
What is a casualty loss? A casualty loss is the result of damage, destruction, or loss of property from a sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty loss does not include normal wear and tear or progressive deterioration. Additionally, in computing a casualty loss, the type of property involved must be identified, because the tax treatment for personal and business property is different.
In general, an individual taxpayer may deduct a personal, non-business, casualty loss relating to their home, household/personal items, and vehicles on their individual tax return Form 1040 by itemizing deductions on Schedule A, Itemized Deductions. The loss must be the direct result of a destructive event (Hurricane Harvey) and the taxpayer must have been the owner of the property. A casualty loss, sustained in a Federally Declared Disaster Area, can be deducted either in the year the loss occurred (2017) or by amending one’s filed tax return for the year immediately preceding the loss (2016). (Hurricane Harvey federally declared disaster counties: https://www.fema.gov/disaster/4332)
Calculating the Amount of a Casualty Loss
The first step is to calculate the amount of casualty loss by subtracting insurance or other reimbursement received or expected from the lesser of:
- The cost or other basis in the property immediately before the casualty, or
- The decrease in the fair market value (“FMV”) of the property as a result of the casualty
Cost or other basis, for casualty loss purposes, is the same as the basis that would be used for calculating gain or loss on the sale of property. Generally, cost plus improvements.
FMV is the price an individual could sell his/her property, to a willing buyer, when neither party has to sell or buy, and the decrease is the difference between the property’s value immediately before and immediately after the casualty.
The FMV is best supported by an appraisal of property’s value immediately before and immediately after the casualty. The IRS has challenged appraisals so documentation and credibility of the appraiser are very important. In general, the IRS defines a “qualified appraiser” as an individual who has earned an appraisal designation from a recognized professional appraiser.
Other reimbursement(s) received, or expected to be received, include payments from an employer’s emergency disaster fund, FEMA payments, forgiveness of a Federal Disaster Loan under the Disaster Relief and Emergency Assistance Act, to name a few. Grants, gifts, and other payments received to help after a disaster are considered reimbursements only if they are specifically designated to repair or replace the property. The receipt of a gift from a relative or friend does not reduce a casualty loss provided there is no limitation or directive relating to the manner in which the money is used by the recipient.
Loss Limitations - After the amount of the casualty loss has been figured, the next step is to determine how much of the loss can be deducted. There are two limitations:
- Reduce the loss by $100, and
- Further reduce the loss by 10% of the taxpayer’s adjusted gross income (“AGI”)
The net result is the allowable loss deduction permitted on Schedule A, Itemized Deductions.
As mentioned earlier, one hurdle victims of a disaster face is determining and documenting what assets were lost or damaged, the original cost, and tax basis (if applicable) to those items as well as the FMV. The IRS has a Record Reconstruction page to assist taxpayers with reconstructing their records after a casualty loss.
- IRS Guide to Reconstructing Records: https://www.irs.gov/newsroom/reconstructing-your-records
- IRS Short Version to Reconstructing Records: https://www.irs.gov/businesses/small-businesses-self-employed/disaster-assistance-self-study-record-reconstruction
This article is a high level peek at casualty losses for individual taxpayers. Not discussed in this article is the fact that it is possible for a taxpayer to actually have a gain related to a casualty loss which would be taxable income. Each individual’s facts and circumstances are unique. Allow one of our LGT tax professionals assist you with your personal situation.
Let our tax professionals help provide you relief.
The material contained in this article is current as of the date produced. The information in this article is for discussion purposes only and should not be relied upon without seeking tax advice specific to your personal facts and circumstances. Any tax advice in this communication is not intended or written by Lane Gorman Trubitt, LLC to be used, and cannot be used, by a client or any other person or entity for the purposes of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any matters addressed herein.