Hurricane Milton has wreaked havoc across much of Florida, just weeks after Hurricane Helene victimized millions throughout the southeastern United States. These two devastating storms are part of a growing number of weather-related disasters that have resulted in substantial losses for many taxpayers this year.
If your family or business has been affected by a natural disaster, you may qualify for a casualty loss deduction and federal tax relief.
Understanding the Casualty Loss Deduction
A casualty loss occurs when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event. Examples include floods, hurricanes, and tornadoes. However, normal wear and tear or progressive deterioration of property does not qualify as a deductible casualty loss.
The availability of a casualty loss deduction depends on whether the losses involve personal or business-use property. Generally, losses related to your home, personal items, and vehicles are deductible if they result from a federally declared disaster authorized by the U.S. president. Losses on business or income-producing property, such as rental property, are deductible even if they do not occur in a federally declared disaster area.
Casualty losses are deductible in the year of the loss. However, if the loss results from a federally declared disaster, you can treat it as occurring in the previous year, potentially speeding up your tax refund by amending the earlier return.
Factoring in Reimbursements and Capital Gains
If insurance covers your casualty loss, you must reduce the loss by the amount of any reimbursement or expected reimbursement, including any salvage value. Receiving reimbursement could also result in capital gains tax liability if the amount you receive from insurance or other reimbursements exceeds the property's cost or adjusted basis. In this case, you must report the gain as income unless you are eligible to defer it.
You can defer reporting the gain if you purchase property similar in service or use to the destroyed property within the designated replacement period. You can also postpone if you acquire at least 80 percent of a corporation owning similar property or use the reimbursement to restore the property.
Alternatively, you can offset casualty gains with losses from personal-use property not located in a federally declared disaster area, which is the only way to deduct such losses in non-disaster zones.
Calculating Casualty Loss
For partially destroyed personal-use property, or business-use or income-producing property, your casualty loss is the lesser of:
The property's adjusted basis immediately before the loss is typically your original cost plus any improvements minus depreciation.
The decline in fair market value (FMV) of the property due to the casualty is the difference between the FMV immediately before and immediately after the casualty.
For destroyed business-use or income-producing property, you calculate the loss amount by subtracting any salvage value and reimbursements from the adjusted basis.
If a single casualty affects multiple pieces of property, you must calculate each loss separately and then combine these losses to determine the total casualty loss. However, an exception applies to personal-use real property, such as a home. The entire property, including improvements such as landscaping, is treated as one item. The loss is the lesser of the decline in FMV of the whole property and the total adjusted basis of the property.
Other limits may apply to the deductible loss amount. Other limits may apply to the deductible loss amount. You must reduce each casualty loss by $100 after subtracting any salvage value and reimbursements for personal-use property. If you experience multiple casualty losses during the tax year, you must reduce each loss by $100 and report each on a separate IRS form. The $100 rule applies individually to each taxpayer if two or more taxpayers incur losses from the same casualty.
Furthermore, for personal-use property, you must also reduce your total casualty losses by 10 percent of your adjusted gross income after applying the $100 rule. As a result, small personal-use casualty losses often result in minimal or no tax benefits.
Keeping Necessary Records
Documentation is essential to claim a casualty loss deduction. You will need to provide evidence of:
Your ownership of the property or, if leased, your contractual liability for the damage.
The type of casualty and the date it occurred.
The direct connection between the loss and the casualty.
The existence of a claim for reimbursement with a reasonable expectation of recovery.
Additionally, you will need your adjusted basis, any reimbursements, and the FMV of personal-use property before and after the casualty.
Qualifying for IRS Relief After a Natural Disaster
This year, the IRS has provided tax relief to taxpayers impacted by various natural disasters. For instance, Hurricane Helene relief extends to Alabama, Georgia, North Carolina, and South Carolina, as well as parts of Florida, Tennessee, and Virginia. This relief typically includes extended filing and other deadlines, and the IRS may offer additional relief to Hurricane Milton victims.
Be aware that you may be an affected taxpayer even if you do not live in a federally declared disaster area if the records needed to meet a filing or payment deadline are in a covered disaster area. For example, if your tax preparer is in a disaster zone and cannot file or pay on your behalf, you may still qualify for filing and payment relief.
Here to Help
If you have experienced casualty losses due to a natural disaster, contact us. We build value-added relationships with each client to understand their business structure to provide solid solutions, and our approach offers direct access to the firm's decision-makers. Our innovative cross-functional services help businesses address the challenges ahead.
Комментарии