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Disaster Loss Tax Deductions

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Casualty Loss Tax Deductions - Disaster Relief

It is heart breaking to see the devastating loss of life and property caused by the winter storm and freezing temperatures a couple of weeks ago.

As of February 14, 2021, all 254 Texas counties had been declared a Federal Disaster area.  If you live in a federally designated disaster county and suffer damage to your home or personal property attributable to the disaster, you may be able to deduct your losses on your federal income tax return.

 

What is a Casualty Loss?

The IRS defines a casualty loss as loss of property resulting from the damage, destruction, or loss of property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruptions.

There are three types of casualty losses:

  1. federal casualty losses
  2. disaster losses, and
  3. qualified disaster losses. 

All three types of losses are referred to as federally declared disasters, but the requirements for each loss vary. 

The biggest difference between a casualty loss and a disaster casualty loss is that itemizing your deductions isn't required to qualify for the deduction.

 

How do I calculate the amount of loss?

  1. First, determine the adjusted basis in the property before the casualty, which is generally what it cost.
  2. Then determine the decrease in fair market value (FMV) of the property as a result of the casualty.  FMV is the price for which you could sell your property to a willing buyer.  The difference between the value of the property before the casualty and it's FMV after the casualty is your "casualty loss".
  3. For your personal property, subtract $500 from your casualty loss to determine your deduction.

NOTE: Some of the casualty loss rules for business or income property are different than the rules for property held for personal use.  We can help you sort out the difference.

 

When can I deduct the loss?

You can elect to deduct the loss for the year the loss occurred or on an amended return for the immediately preceding tax year.  Individuals and businesses in a federal disaster area will obtain a refund more quickly by filing an amended return.  But, be aware that if you file an amended return the IRS will be taking a second and deeper look at your return.

 

Are there exceptions to what I can deduct?

Of course there are!

  • Casualty loss does not include losses from normal wear and tear or progressive deterioration from age.
  • If your property is insured but you failed to file a timely claim for insurance reimbursement, you can't deduct the loss as a casualty.
  • You may deduct property losses that are not covered by insurance or other reimbursement.

What records do I need to keep?

Casualty losses are a hot ticket for the IRS.  Claiming them may increase your chances of being audited.  Make sure you document your losses.  You'll need to have:

  • Documents showing that you owned each asset you claimed was damaged or destroyed - for example, a deed or receipt
  • Contracts or purchase receipts showing the original cost of the item, plus any improvements you made to it, and
  • Evidence of the property's fair market value, such as insurance records, an appraisal, or receipts for the cost of repairing it.

Your tax preparer will need a copy of your documentation in order to prepare the required tax form needed to claim the loss.