- Casualty loss deduction
Casualty loss deduction
If your home or other property is damaged or destroyed by a natural disaster, you could qualify for a federal tax break called a casualty tax loss – but only if you are uninsured or under-insured.
Such tax breaks are not easy or automatic, however, and they won’t replace your damaged or destroyed property. You might recover as little as 10 or 20 cents on the dollar. But given a sizable loss, it’s worth investigating.
What's a casualty tax loss?
The IRS says it must be the result of an event that is:
- Sudden – Swift, not gradual or progressive, such as termite damage to your roof.
- Unexpected – Not ordinarily anticipated or intended. Your puppy soiling an oriental rug, for instance, could have been anticipated.
- Unusual – Not a day-to-day event.
What if my property is insured?
Most casualty losses are covered by private insurance.
Your loss is deductible only if your property was not insured or partially insured.
How do I calculate whether my loss is tax deductible?
- A written appraisal by a reputable expert detailing what your house or property would have sold for on the open market, or its fair market value, before the casualty, and its value after the damage.
- The combined total reimbursement you got from your insurer and any relief agencies.
- Your taxable income during the year you deduct the loss. That’s your AGI, or adjusted gross income, which is your income from all sources (minus certain non-taxable items such as 401(k) contributions and alimony).
Can you give me an example?
A couple whose house was valued at $170,000 before it was damaged by a hurricane gets an appraised showing its worth at $100,000 after the storm. The owners have a $70,000 loss.
They collect $48,000 in insurance, leaving a shortfall of $22,000. They then subtract $100, as required by the IRS for each loss incident, to get $21,900.
They then calculate 10 percent of their $63,000 annual adjusted gross income, or $6,300, and subtract that from $21,900. Their casualty loss deduction is $15,600.
That deduction saves the couple, who in 2007 were in the 15 percent tax bracket, $2,340 in taxes, about 11 percent of their uninsured loss.
Follow this link to get IRS Form 4684, for casualties and theft, http://www.irs.gov/pub/irs-pdf/f4684.pdf.
Typically, you deduct your loss during the tax year the casualty occurred. So you might not know when filing how much your insurer will pay.
You can estimate your deductible loss on your tax return even if you don’t know the extent of damage or insurance. But be careful not to overestimate. If you do, you might get stuck with extra income and a higher tax bill later.
What if my financial records are destroyed?
The IRS recommends that taxpayers make reasonable estimations based on the information available, act in good faith and be aware that the agency considers each situation case-by-case.
Disaster tips
- Be patient. It could take months or years to know the property loss extent.
- Maximize insurance payouts and tax deductions by documenting thoroughly.
- Verify damage by taking extensive photos and making exhaustive list of destroyed or damaged property. Download or order the free IRS workbook “Casualty, Disaster, and Theft Loss Workbook Publication” at http://www.irs.gov/publications/p584b/index.html.
- Have competent appraisers, such as builders, engineers and real estate appraisers, document the property value before and after the loss -- and put it in writing.
