| A hurricane strikes, and your home is partially destroyed. The bad news is that your insurance does not cover the total cost of the damage, and you are wondering whether there will be any good news from the Internal Revenue Service at tax time.
First, some definitions are in order. A casualty loss is the damage, destruction, or loss of property resulting from a sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, volcanic eruption, terrorist attack, or vandalism. Loss of property due to progressive deterioration is not deductible as a casualty loss, nor is damage caused by a pet, by accidental breaking during normal usage, or by a car accident that was caused by your willful negligence.
If your home is located in a Presidentially declared disaster area and your state or local government ordered you to tear it down or to move it because it was no longer safe to live in, any loss in value is treated as a casualty loss from a disaster.
A theft is the taking and removing of someone else's money or property with the criminal intent to deprive the owner of its possession. The taking of property must be illegal in the state in which it occurred. Although the simple disappearance of something is not theft, it may qualify as a casualty if the disappearance was the result of an identifiable event that was sudden, unexpected, or unusual.
To determine the amount of your loss, you must have three pieces of information. First, you have to know your adjusted basis in the property, which is usually its cost plus or minus certain adjustments such as improvements or prior casualty losses. The second important determination is the decrease in the fair market value of the property as the result of the casualty, disaster, or theft. Finally, you must keep track of insurance reimbursements. To calculate your loss, compare the adjusted basis with the decrease in the fair market value. Take whichever number is the smallest and deduct any insurance or other reimbursements you have received or expect to receive. This is your loss from the casualty.
If your reimbursement exceeds your adjusted basis in the property, you have a gain even if the decrease in the fair market value of the property is smaller than your adjusted basis. If you have a gain, you may be liable for taxes on it unless you choose to postpone the gain by purchasing property that is similar or related in use to the property that was destroyed or stolen.
If you held the property for personal use, you must reduce your loss by $100 for each casualty or theft event during the year. The total of all casualty losses of personal use property for the year is then reduced by 10 percent of your adjusted gross income.
As a general rule, you are only entitled to deduct casualty losses in the year that the casualty occurred. However, if the deductible loss resulted from a disaster in a Presidentially declared disaster area, you have the choice of deducting it in the year of the casualty or in the prior year. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |