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Tips for Maximizing Disaster Recoveries

All too often we hear about damage caused by floods, fires, and other natural disasters. Just in case this ever happens to you we’d like to remind you that keeping records will help ease your way in getting tax deductions or insurance reimbursements.

You can deduct nonbusiness property losses caused by casualty within limits. But you won’t get the deduction you’re entitled to unless you can prove not only that you suffered a loss, but also the amount of the loss. Equally important is to make sure you know what records will satisfy your insurance company.

For starters you should put together an inventory of your property. You might do this by making a detailed listing, taking photographs or making a video recording. Whichever method you choose, be sure to keep a duplicate record in a separate location. A description of the property is key information. It’s also necessary to maintain proper records of your cost or other tax basis.

Also, be sure to document the state of your property after the disaster. Remember that there are several relief provisions for disasters in federally designated disaster areas. In particular, you are allowed to take a casualty loss on an amended return for the prior year, and favorable rules apply to insurance proceeds if your home or contents are destroyed which make it easier to defer or avoid gain.

Please don’t hesitate to call if we can help you further.

Personal Use Property Casualty Losses

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.