If your home or other property is damaged as a result of a fire, earthquake, flood, hurricane, vandalism or similar event, you may be able to take a deduction for the loss. To be deductible as a casualty loss, the property must be damaged, lost or destroyed by a sudden, unexpected or unusual event. Therefore, using the term “tax planning” when referring to a casualty loss may seem inappropriate. However, if you have suffered a loss, there are several tax issues that you need to consider, such as determining the year in which to take the loss, the benefit of married individuals filing separately, valuation of the property, limitations and adjustments to the loss, and finally the tax consequences of any insurance reimbursements or recoveries.
A casualty loss is not allowed when the loss is gradual, such as insect damage to trees or water damage from a leaky roof. Therefore, damage or destruction resulting from progressive deterioration of property, such as beachfront erosion, would not qualify as a casualty loss. Loss of property through theft is deductible, but merely misplacing property is not.
The amount of a deduction is generally determined by the difference in the fair market value of the property before and after the loss, or by the cost of the necessary repairs to restore the property to its original condition. However, the amount of a loss cannot exceed your basis. Even with the destruction of a home or building, the loss is actually not a total loss since the land retains its value.
The amount of the loss is further reduced by any amounts covered by your insurance company, regardless of whether or not you file a claim. After the loss is determined and the insurance reimbursement is subtracted, the loss deduction is generally reduced by $100 for each casualty, any casualty gains, and 10 percent of your adjusted gross income.
Recovering from a casualty loss takes time and planning. There are many things to consider, but our office is available to answer your questions. Please call us to discuss your casualty loss tax issues and determine your best options to recovery.