Connie Smotek, Texas A&M AgriLife Extension Service and J C. Hobbs, Oklahoma Cooperative Extension Service
The dollar value of property losses due to hurricanes, fires, floods, tornadoes, earthquakes, etc. can be substantial. Federal income tax regulations provide relief by allowing deductions for losses of both business-use and personal-use property.
To determine the extent of a loss, the owner of the property will need to compare the property’s condition immediately before and after the event to determine the extent of the loss and whether the amount of the loss is deductible from taxable income. If the damaged property was insured, there may be the possibility of a taxable gain if the insurance reimbursement is greater than the amount of the loss.
Farm and Business-Use Property
A business owner may deduct a casualty loss to business property. For a loss to be deductible, a taxpayer must have a record containing a description of the casualty (fire, tornado, etc.), when it occurred, and proof that the loss was a direct result of the event. The taxpayer also must have ownership of or be liable for the damage to the property. For insured property, there is a need to provide information regarding possible reimbursement for all or part of the loss. The deductible loss is limited to the adjusted basis of the asset.
To determine the amount of the casualty loss for personal-use property, the following steps are used. First, determine the adjusted tax basis in the property immediately before the casualty. The adjusted tax basis equals the price paid for the item plus the cost of any improvements made to the property and less any damage to the property. Next, determine the difference between the fair market value immediately before and immediately after the casualty. In many cases, an appraisal will be needed to document this for tax purposes. Finally, use the smaller of the amounts from either step one or step two and reduce it by any insurance or other reimbursement you receive or expect to receive in the future.
The loss is reported as an itemized deduction subject to two rules limiting the allowed deductible amount. First, reduce the loss by $100 for each casualty or theft event that occurred during the year after you have determined the loss using the steps above. Second, combine all the losses from each event and reduce the total amount by 10 percent of your adjusted gross income (AGI). This amount will be the allowed casualty and theft loss treated as an itemized deduction.
Reconstructing records after a disaster will be essential for tax reporting, getting federal assistance, or insurance reimbursement. Historical records that you need to prove your loss may have been damaged or destroyed in a casualty. IRS Publication 2194, Disaster Resource Guide contains the IRS prescribed methods of reconstructing records.
Due to the complex nature of the casualty loss rules, it is important to work closely with your tax advisor. A trained tax professional can assist by making sure that you properly document your losses and take advantage of all the potential income tax benefits and special rules to reduce the adverse economic impact of the casualty. The IRS has a variety of publications available to assist property owners who experience disaster losses at http://irs.gov and search for “disasters”.