Unfortunately, disasters happen. We’ve seen how devastating these can be. One slightly bright spot is you may deduct losses at tax time. Here’s how to deduct losses after a disaster.
Deduct Losses After A Disaster
If a fire, earthquake, storm, floods, terrorism, or similar disaster damages your property, you may have undergone a casualty loss. You may deduct that on your tax return as an itemized deduction.
Casualty losses are damage to property caused by a disaster. The casualty loss must involve some external force. You get no deduction if you simply lose or misplace property. Nor do you get one if something wears down over time.
You get no deduction if insurance fully covers the loss.
How Much Can I Deduct After A Disaster?
The IRS limits the personal deduction for casualty losses. You can deduct only the amount of the loss that exceeds 10 percent of your adjusted gross income for the year.
This greatly limits or eliminates many casualty loss deductions. To add insult to injury, you must also subtract $100 from each casualty or theft you suffered during the year.
This reduction applies to each total casualty or theft loss. Only a single $100 reduction applies.
An Example of Deducting Losses After A Disaster
Ken suffers $5,000 in losses to his personal property when a hurricane strikes his home. His adjusted gross income for the year is $75,000. He can deduct only that part of his loss that exceeds $7,500 (10 percent x $75,000 = $7,500). He lost $5,000, so he gets no deduction.
The 10 percent of AGI and $100 floors apply only to personal use property. They do not apply to business property. Compute the deduction as if two separate pieces of property are involved if you use it for both.
Your deduction depends on how damaged the property was. You must always reduce your casualty losses by the amount of any insurance proceeds you actually receive or reasonably expect to receive.
If more than one item was wholly or partly destroyed, you must figure your deduction separately for each item and then add them all together.
Use this formula if the property is completely destroyed:
- Adjusted Basis – Salvage Value – Insurance Proceeds = Casualty Loss.
Your adjusted basis is the property’s original cost, plus the value of any improvements.
Example: A fire completely destroys Sean’s. The sofa cost $2,000, so this is its adjusted basis. Sean is a renter and has no insurance covering the loss. Sean’s casualty loss is $2,000. ($2,000 adjusted basis – $0 salvage value – $0 insurance proceeds = $2,000.)
Claiming Losses For Partially Destroyed Assets
This changes if the property is only partly destroyed. Your casualty loss deduction is the lesser of the decrease in the property’s fair market value or its adjusted basis. Your basis is reduced by any insurance you receive or expect to receive.
Determine the decrease in basis by the cost to repair it. This is only as long as the repairs only restore the property to the way it was before the disaster.
Example: Sally purchased her home for $400,000 and added $50,000 of improvements, thus its adjusted basis is $450,000. The home suffers severe flood damage in a hurricane. Sally’s loss is not covered by her homeowner’s insurance.
The cost to repair the damage is $100,000. The $100,000 repair cost is less than the home’s $450,000 adjusted basis, so Sally’s casualty loss is $100,000
When to Deduct Casualty Losses
You can deduct casualty losses in the year the casualty happened. Yet, you have another option if it happened from a federally-declared disaster.
You can treat the loss as having occurred in the prior year. Deduct it on your return or amended return for that tax year. You can get a quick tax refund this way.
Record Keeping for Casualty Losses
The IRS considers casualty losses a red flag for audits. Make sure you can document your losses. You’ll need to have:
- Documents showing that you owned each asset you claimed
- Evidence of the property’s fair market value, such as insurance records, an appraisal, or receipts for the cost of repairing it.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.