Hurricane Isaac and the devastation it wrought to the Gulf Coast region in August is a reminder that a disaster can strike at any time in any location. Hopefully, you have adequate insurance, such as homeowners or renters insurance and flood insurance, to cover your property losses. If you don’t, the tax law may be able to help ease your resulting financial difficulties.
If you itemize deductions, you can write off the uninsured portion of the loss to your property, subject to two limitations:
If you are located in a disaster area eligible for FEMA assistance, you can opt to deduct your loss on the return for the current year or for the prior year. Claiming the loss on the prior year enables you to obtain a quick refund, which is money that can help you rebuild following the disaster.
Proving the amount of the loss
You have to prove two things: (1) that your loss was the result of a casualty event, such as a severe storm, mudslide, or fire; and (2) the amount of your financial loss from the casualty event.
If you experience a casualty loss from an event affecting your entire city, town, or area, such as Hurricane Isaac or the Colorado wildfires, you won’t have any trouble explaining that you suffered damage or destruction to your property. If you are the only person impacted by a casualty event, such as a fire to just your home, you’ll need pictures, newspaper clippings, insurance claims, or other evidence that your property was damaged or destroyed by a casualty event. This should not be too difficult.
The amount of the casualty loss is limited to the lesser of the fair market value of the property immediately before the casualty, reduced by its fair market value immediately after the casualty, or the property’s adjusted basis (subject to the two limits mentioned earlier). The trickiest part of claiming a casualty loss is proving the amount of the loss. It can’t take into account any ascetic or sentimental value to you; it must be based solely on the facts.
Fair market value usually is ascertained by an appraisal made by a qualified appraiser. The appraisal must take into account the effects of any general market decline affecting undamaged as well as damaged property, which may occur simultaneously with the casualty event.
Instead of obtaining an appraisal, the cost of repairs to the damaged property is acceptable evidence of the loss in value if:
If you’ve experienced a casualty loss, talk to your insurance agent and your tax advisor so you can maximize your reimbursements while claiming a tax deduction for uncompensated losses.
New data on returns filed during the government’s 2010 fiscal year reveal some interesting facts:
Source: Statistics of Income Bulletin, Fall 2012View all factoids