If you suffered damage to a primary residence or resort property from the recent East Coast hurricanes, you may be eligible for some income tax relief for uninsured losses. The IRS permits an income tax deduction for casualty losses that are unreimbursed. The tax code defines a “casualty loss” as occurring from a sudden, unexpected or unusual cause including fire, theft or storm.
The casualty loss is an itemized deduction that can be claimed on your personal income tax return.
Unfortunately, the deductible loss is limited to the amount in excess of 10% your adjusted gross income plus $100. For example, your 2017 AGI is $150,000 and the uninsured damage to your beach home is $35,000. Your tax deduction is then $19,900 - $35,000 loss minus $15,000 (10% of AGI) minus the $100.
If the damaged property is insured, then two conditions must be met. First, the loss is only the amount of damage in excess of the actual or reasonably expected insurance recovery. Second, you must timely file an insurance claim.
How do you determine the amount of loss? The IRS regulations provide specific guidance. Under the regulations, the fair market value of the property immediately before and immediately after the casualty should be ascertained by a competent appraisal, which “must recognize the effects of any general market decline affecting undamaged as well as damaged property which may occur simultaneously with the casualty, in order that any deductible loss under this section shall be the actual loss resulting from damage to property.”
Your loss is best determined under the regulations by having a “before and after” appraisal. For example, the home value prior to the storm was $480,000 and $390,000 after the storm and there is $60,000 of insurance recovery. The loss is $30,000 - $480,000 before value minus the $390,000 after value and minus the $60,000 insurance recovery. The deductible portion must be determined by reducing this $30,000 by 10% of your AGI and the $100.
The amount of loss is also limited to your cost basis in the property if that amount is less than the before and after loss calculated above.
Rather than a before and after appraisal, the regulations also permit you to determine the amount of loss from the cost of repairs to the damaged property. You must show –
- The repairs were necessary to restore the property to the same condition it was in immediately prior to the casualty,
- The amount spent on the repairs was not excessive,
- The repairs were not for anything other than the damage, and
- The value of the property after the repairs did not exceed the value of the property immediately prior to the casualty.
In what year do you claim the casualty loss deduction? Generally, the loss is claimed in the taxable year in which the casualty occurs. This requirement may create some timing issues with regard to filing your income tax return. You may not be able to obtain the necessary before and after appraisals prior to the April 15 tax return due date, in which case you may consider filing a request for an extension of the return due date until October 15. Second, you may not know by the tax filing date the amount of expected insurance recovery. The tax regulations provide that if there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received can be deducted until the amount of recovery can be ascertained with reasonable certainty.
If the loss occurs in a presidentially declared federal disaster area, you may choose to claim the loss in the prior taxable year rather than the year of the loss. This choice requires an election statement be included with your income tax return. Electing to claim the loss for the year prior to the loss may result in a quicker refund of taxes, but you will need to compare the amount of potential tax benefit based on your expected taxable income for the loss year to the actual taxable income of the prior year.
The determination of the amount of casualty loss and the best year for claiming the deduction can be complex in many situations. We recommend you consult with your tax advisor to ascertain the best course of action for you.
The material presented above is in summary form and is provided only for a general understanding of the casualty loss rules. It should not be relied upon to make any determination of whether you are or are not entitled to a casualty loss tax deduction. An analysis of your particular situation is necessary.