This reflects the IRS update posted on October 5, 2017
The damage you may have incurred on personal use property in the federal disaster areas for Hurricanes Harvey, Irma, and Maria will qualify as a casualty loss for tax purposes if your property suffered damage that was not covered by insurance. Under new legislation, casualty losses in the Harvey, Irma, and Maria federal disaster areas must exceed $500 but are no longer subject to the 10% of AGI limitation that applies to normal casualty losses. The loss is an itemized deduction not subject to the 2% or 3% limitations. Â The new legislation expands the deduction to non-itemizers by increasing an individual’s standard deduction by the amount of the net casualty loss from these federal disaster areas. Â Please note that casualty losses incurred on business and income-producing property are deductible regardless of whether you itemize, and are not subject to the $500 and 10% of AGI limitations.
The loss is the lesser of the adjusted basis in the property immediately before the storm compared with the decrease in fair market value due to the storm. The decrease in value is measured as the difference in fair market value of the property immediately before the storm compared with the fair market value immediately after the storm. This decrease is reduced by insurance proceeds received or expected to be received, and then reduced by $100 and 10% of your AGI. If the insurance proceeds exceed the basis in your property, you will have a casualty gain. You may be able to elect to defer such casualty gain if applicable.
If you have insurance but decide to forego filing an insurance claim, you still must reduce the casualty loss by the amount insurance would have covered, which usually means you’ll only be able to deduct the amount of your deductible.
The change in value generally can be estimated by the cost to repair the property so it is vital that you keep receipts for all expenses paid for repairs, debris removal, and replacement property. To use the cost-of-repairs method, the repair expenditures must actually be made; estimates cannot be used. Only the cost to restore the property to its original condition should be considered; costs that result in an improvement to the property should be disregarded. The value of the property after the repairs cannot exceed the value of the property before the repairs. If your damage is extensive, you should consider hiring an independent appraiser.
- Each asset you own is considered separately so you need to be able to provide schedules of your personal property such as furniture, appliances, vehicles, boats, clothing, etc. Attached are IRS schedules that provide a format you may find useful. If you are filing an insurance claim, we will be able to use the insurance company’s Proof of Loss in preparing the tax form used to claim the loss. For your personal residence, the land and improvements (i.e., buildings, landscaping) may be treated as a single piece of property. For rental properties, you must allocate basis to land and improvements so there is less basis available to claim as a casualty loss.
- We will need an estimate of the fair market value of your home before the loss. The county appraisal district valuation is often a good starting point. We can discuss this further as the facts are available.
- Temporary living expenses and storage of your household items while your home is not usable are not deductible. Insurance reimbursements that you receive for temporary living expenses create taxable income only to the extent they exceed your increased living expenses caused by the casualty.
- Food, medical supplies, and other forms of general disaster-related assistance (other than compensation for damage property) are not considered in calculating the amount of casualty loss, nor are they considered to be taxable income.
- Since Hurricanes Harvey, Irma, and Maria are federally declared disasters, you can elect to deduct your losses on property located in these federal disaster area in 2016 instead of 2017 if that would result in a better tax benefit or provide better cash flow benefits. You can amend your 2016 return to claim the loss once the facts are known to determine which provides the better result.