This week marks the anniversary of Hurricane Sandy. If another major disaster were to strike, take relief in knowing that help may be available. For many, a silver lining comes in the form of a casualty loss deduction on their federal tax return.
Taxpayers can deduct casualty losses relating to property they personally own that becomes damaged or lost as a result of a catastrophe or theft. According to the Internal Revenue Service, a casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. If the sudden and unexpected formation of mold, for example, causes property damage, it may possibly be claimed as a casualty loss deduction on the property owner’s federal tax return.
“If someone lost their beach house because the ocean kept washing it away day by day, that wouldn’t qualify as a casualty,” says Greta Hicks, a certified public accountant in Spring, Texas.
“A casualty tax deduction can result from damage or destruction or loss of your property from any sudden, unexpected, or unusual event such as a hurricane, tornado, fire, flood, earthquake, or, in some places, even a volcanic eruption,” adds Robbie Hampton, a certified public accountant and managing partner for Bishop, Hampton & Associates L.L.C. in Atlanta.
How to Deduct a Loss
To deduct a casualty loss, the IRS asks that you show the type of casualty proof that the loss was the direct result of the casualty, and proof that you are the owner or contractually liable to the owner, along with information regarding insurance or other reimbursement. In the case of theft, you should show when you discovered the property missing, that you are the owner, and any evidence of an existing claim for reimbursement. Theft includes the taking of money or property through means such as burglary, extortion, and embezzlement.
While you don’t have to attach proof to the actual tax return, Hicks says, you must have records that support the deduction in case your return is audited. And she says that casualty losses are a red flag for an IRS audit.
“The hardest part of a casualty deduction is determining what things cost,” says Hicks. “Think of all the contents of the house—all the furniture, all the appliances, and all the family mementos.”
To determine home values, you can often find the value of a house through comparable values in the Multiple Listing pages used by real estate agents.
“Or you can go to the county courthouse and go through paperwork or to the title company that handled the purchase,” says Hicks. “They usually keep a copy of the real estate transaction.”
If you’re still making payments on a vehicle, check with your lender. Resources such as Kelley Blue Book and NADA can help you determine the fair market value of an older vehicle. Taking photographs after the casualty will help to show the extent of the damage.
For more, refer to “Reconstructing Your Records” at www.irs.gov/uac/Reconstructing-Your-Records.
- Subtract your insurance reimbursements. When claiming a casualty loss deduction, you will need to subtract any insurance reimbursement. You may be able to estimate the amount of your loss by determining the adjusted basis of the property before the casualty or theft, and the decrease in the property’s fair market value as a result of the casualty or theft. From the smaller of these two amounts, subtract insurance or any other type of reimbursement you receive or expect to receive.
- Get your deduction faster. You may file for the deduction on your 2013 taxes, or if you’re in a federally declared disaster area, you may amend your 2012 return for a quicker turnaround. You’ll find the list of federal disaster areas at www.fema.gov.
For more information, go to www.irs.gov or call 800-829-1040. See IRS Publication 547, “Casualties, Disasters, and Thefts,” and form 4684, “Casualties and Thefts,” to claim a deduction for a loss.