Home Damaged? Let the Government Pay

Homeowner’s insurance may not cover all of your losses resulting from a storm or other unexpected catastrophe. Fortunately, the tax law can help by allowing you to deduct the uninsured loss. Here’s what you need to know to maximize this helpful write-off.

Determine whether your loss is a deductible casualty

Losses to your home may be deductible only if they result from a sudden, unexpected even, such as a fire, storm or earthquake. Gradual deterioration, such as termite damage, is your problem, not Uncle Sam’s.

The loss applies only to the economic impact on the residence. You cannot be compensated for your personal angst or sentimental losses. Only home-related losses count. For example, if your pet is killed in a tornado or you suffer a physical injury during a hurricane, these losses don’t count for your casualty loss deduction.

Also, the first $100, plus 10% of your adjusted gross income cannot be deducted. Only uncovered losses in excess of these limits create an itemized deduction for you.

Important: You must submit an insurance claim if you have coverage for your loss. You can’t opt to not put in a claim just because you expect this may increase your premiums or even lead to cancellation of coverage.

Get money back now

If the loss occurs in an area designated as a federal disaster area–one qualifying for federal disaster relief-there’s a special tax break to get money into your hands quickly. Your casualty loss is treated as a disaster loss, which allows you to deduct it on the return for the year beforethe year of the disaster. For example, say in February 2008 your home is destroyed in an ice storm and your town is eligible for FEMA assistance (federal disaster relief). You can opt to deduct the loss on your 2007 income tax return instead of waiting to file your 2008 return (in 2009). By deducting the loss on the prior year’s return, you get an immediate tax refund and can use the money now to rebuild.

What you need to know about a disaster loss:

• You must elect to claim it on the prior year’s return; this is not automatic.
• It usually makes sense to deduct it on the return that will give you the greater tax benefit (in most cases the return on which you have lower adjusted gross income, or AGI). This means waiting until you know your AGI for the year of the disaster.

Federal assistance programs

Tax breaks aren’t the only way in which the government can help you get through the storm and, hopefully, make it possible to get back to living in your home. There are several government programs that offer assistance, including:

• FEMA provides assistance with critical expenses, such as temporary housing, not covered by homeowner’s policies. This won’t help restore your home, but can help you and your family get through a disaster.
• Small Business Administration offers disaster home loans to help repair or replace damages to a home and personal property.

For the future

If you weathered this storm, become better prepared for the next one. Review your homeowner’s insurance policy with a knowledgeable agent to fill in coverage gaps. Make sure to carry flood insurance if you live in a flood zone.