Tax breaks for property losses

What is a casualty?

A "casualty"  is damage, destruction, or loss of property due to an event that is sudden,  unexpected, or unusual. Deductible casualty losses can result from many  different causes, including, but not limited to:

• Earthquakes,
• Fires,
• Floods,
• Government-ordered  demolition or relocation of a building that is unsafe to use because of a  disaster,
• Landslides,
• Sonic booms,
• Storms,  including hurricanes and tornadoes,
• Terrorist  attacks,
• Vandalism,  including vandalism to rental property by tenants, and
• Volcanic  eruptions.

One thing  all the events in the list above have in common is that they are sudden -- they  happen quickly. Suddenness is the hallmark of a casualty loss. Thus, loss of property  due to slow, progressive deterioration is not deductible as a casualty loss.

For  example, the steady weakening or deterioration of a building due to normal wind  and weather conditions is not a deductible casualty loss.

When casualty losses are deductible

In the case  of a home used solely for personal purposes, a casualty loss may be deducted  only if:

• You itemize  deductions,
• Each  casualty loss exceeds $100, and
• The total  of all casualties suffered during the year exceeds 10 percent of your adjusted  gross income after subtracting $100 from each loss suffered.

Losses to  business property are not subject to the above limitations.

Amount of casualty loss deduction

How much  you may deduct depends on whether the property involved is completely destroyed  or partially destroyed, and whether the loss was covered by insurance. If more  than one item is damaged or destroyed, you must figure your deduction  separately for each.

If your  property is personal-use property or is not completely destroyed, the amount of  your casualty or theft loss is the lesser of:

• Your  property's adjusted basis (usually its cost, increased or decreased by  improvements and/or depreciation), or
• The  decrease in fair market value of your property due to the casualty.

If your  property is business or income-producing property, such as rental property, and  is completely destroyed, and the fair market value of the property before the  casualty is less than the adjusted basis of the property, then the amount of  your loss is your adjusted basis.

The role of insurance

You may  take a deduction for casualty losses to your property only if -- and only to  the extent that -- the loss is not covered by insurance. If the loss is fully  covered, you get no deduction. You can't avoid this rule by not filing an  insurance claim.

If you have  insurance coverage, you must timely file a claim, even if it will result in  cancellation of your policy or an increase in your premiums. If you don't file  an insurance claim, you cannot obtain a casualty loss deduction.

You must  reduce the amount of your claimed casualty loss by any insurance recovery you  receive or reasonably expect to receive, even if it hasn't yet been paid. If it  later turns out that you receive less insurance than you expected, you can  deduct the amount the following year.

If you  receive more than you expected and claimed as a casualty loss, the extra amount  is included as income for the year it is received.

Disaster areas

Casualty  losses are generally deductible in the year the casualty occurs. However, if you suffer a deductible casualty loss in an area that is  declared a federal disaster by the president, you may elect to deduct the loss  for your taxes for the previous year.

This will  provide you with a quick tax refund since you'll get back part of the tax you  paid for the prior year. If you have already filed your return for the prior  year, you can claim a disaster loss against that year's income by filing an  amended return.

You can  determine if an area has been declared a disaster area by checking the Federal  Emergency Management Administration (FEMA) website at https://www.fema.gov/news/disasters.fema.

A great  deal more useful information about deducting casualty losses may be found at  the IRS website at www.irs.gov.

Author: Stephen Fishman is a tax expert, attorney and author who has published 18 books.

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