Casualty and Theft Losses PDF Print E-mail
Wednesday, 05 November 2008 00:42

If you have suffered personal losses from a theft or from disasters such as a fire, hurricane, tornado, or flood, you may be able to deduct these losses on your return. Personal casualty and theft losses are reported on Form 4684, Casualties and Thefts, Section A and entered on Schedule A. You must be able to itemize deductions on your federal return to be able to claim your loss.  If you are in a federally declared disaster area and you do not itemize deductions, you may claim your net casualty losses as an addition to your standard deduction amount.

If your property is covered by insurance, you should file a timely insurance claim for reimbursement of the loss. If you do not file an insurance claim, the IRS may limit your eligible casualty or theft loss to the amount that is normally not covered by your insurance, such as your insurance deductible amount.

If the President of the United States declares your area a federal disaster area, you may be entitled to additional tax relief. If you have any questions about casualty and theft losses, contact “The Mobile Tax Man” for more information or assistance. http://www.irs.gov/publications/p584/index.html

See the following information relating to casualty and theft losses:

  • Defining a Casualty or Theft Loss.
  • Proving a Loss.
  • Personal Casualty or Theft Losses.
  • Personal Casualty or Theft Gain.
  • Disaster Area Gains.
  • Reimbursements.
  • Disaster Relief Grants and Payments.

Defining a Casualty or Theft Loss
A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. It does not include damage from events that are gradual, or damage from routine wear and tear. For example, a termite infestation, mold damage, or deterioration from normal wind and weather do not qualify as casualties.

The cost of repairing damaged property, restoring landscaping to its original condition, or the cost of cleaning up after a casualty is not part of your deductible loss. If the repairs meet certain conditions, however, you may be able to use these costs as a measure of the decrease in fair market value of your property. You can use repairs as a measure of decrease in fair market value if all of the following are true:

  • The repairs are necessary to restore the property to the condition it was in immediately before the casualty
  • The amount spent for repairs is not excessive
  • The repairs only correct the damage caused by the casualty
  • The value of the property after the repairs is not, as a result of the repairs, more than the value of the property immediately before the casualty

You also cannot deduct the loss of future profits or income due to the casualty. For example, if the prices of homes in your neighborhood drop after a widespread flooding near your area, the decline in market value of your home is not a casualty loss.

A theft includes, but is not limited to, the taking of money or property by blackmail, burglary, embezzlement, extortion, kidnapping for ransom, larceny, or robbery. The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Generally, you cannot deduct the loss of property that has been simply lost or mislaid. However, if the accidental loss or disappearance of property results from a casualty, it could be deductible depending on the circumstances.

Expenses you incur for preventative measures against casualties and theft are not deductible as losses. Examples of preventative measures are boarding up your house before a hurricane, building a levee to prevent future flooding, or installing a security system after a break-in. Instead, you might be able to capitalize some of these expenses, if they are for permanent improvements, and add them to the basis of your property.

Incidental expenses you have as a result of a casualty or theft are not deductible and are not included in your total loss. Incidental expenses include the cost of medical treatment for personal injuries, the cost of temporary housing or hotel fees, or the cost of renting a car.

Proving a Loss
To deduct a casualty or theft loss, you must be able to prove to the IRS that:

  • You owned the property or you are contractually responsible to the owner for any damage to the property
  • There was an event that directly caused your loss (indicate the type of casualty and when it occurred, or indicate it was a theft and when it was discovered)

You must also show the IRS whether there is any reimbursement or recovery you can obtain for the property.

You will need to establish your basis in the property and the difference in the property's fair market value before and after the event. The amount of loss you can deduct will be based on the smaller of these as discussed in the Personal Casualty or Theft Losses section.

Save any police reports, newspaper articles, photographs or videos, bills of sale, receipts for improvements or repairs, payment checks, deeds, professional appraisals, copies of insurance claims, and insurance adjuster appraisals to support any casualty loss deduction you take on your return. If obtaining a professional appraisal is not cost-effective or possible, you may also be able to establish fair market value by using comparable classified ads or industry standard "blue book" values (for automobiles).

As a general rule, you should always keep any documentation to support the basis or fair market value of your property separate from your property. Keep copies with a family member, a friend, or in your safe deposit box to prevent loss of these documents when your property is damaged, destroyed, or stolen.

Personal Casualty or Theft Losses
Generally, if a single casualty or theft involves more than one item of property, you must calculate the loss on each item separately and combine the losses to determine the total loss from that casualty or theft. When calculating a casualty loss on personal use real property, however, the entire property is treated as one item. For example, your entire property could include your storage shed, fence, trees, and shrubs in addition to your home.

Calculate your loss by using the smaller of the following:

  • The decrease in fair market value of the entire property (fair market value is the price for which you could have sold the property to a willing buyer if neither of you had to sell or buy the property and both knew all relevant facts)
  • The adjusted basis of the entire property (adjusted basis is usually what you paid for the property, increased or decreased by various events such as improvements or earlier casualty losses)

Reduce your loss by any insurance or other reimbursement you receive or expect to receive.

You must further reduce your loss by $500. This $500 reduction applies to each casualty or theft event that occurred during the year, regardless of how many items of property are involved. Next, reduce your total casualty losses by 10% of your adjusted gross income (AGI). The remaining balance is the amount of your deductible casualty or theft loss.

If you use an appraisal to support your determination of the fair market value of your property, you can deduct the cost of getting an appraisal separately on Schedule A as a miscellaneous itemized deduction subject to 2% of your adjusted gross income.

For example, Jose bought a home a few years ago. He paid $150,000 ($10,000 for the land and $140,000 for the house). He also spent an additional $2,000 for landscaping. This year, a tornado destroyed his home, including the shrubbery and trees in his yard. An appraiser valued the property as a whole at $175,000 before the tornado, but only $50,000 afterwards. The insurance company paid Oscar $95,000 for the loss. His adjusted gross income for this year is $70,000. Calculate his casualty loss deduction as follows:

  • Adjusted basis of the entire property ................................................... $152,000
  • Fair market value of entire property before casualty.............$175,000
  • Fair market value of entire property after casualty.................-$50,000
  • Decrease in Fair market value of entire property (Line 2 - Line 3)               ......................$125,000
  • Loss (smaller of Line 1 or Line 4) ........................................................$125,000
  • Subtract insurance ..................................................................................-$95,000
  • Loss after reimbursement.........................................................................$30,000
  • Subtract $500 ..............................................................................................-$500
  • Loss after $500 rule..................................................................................$29,500
  • Subtract 10% of $70,000 adjusted gross income......................................-$7,000
  • Casualty loss deduction.......................................................................... .$22,500

 

Deduct your loss in the year that the casualty occurred or the theft was discovered. If you have not received your insurance reimbursement at the time of your tax preparation, you can estimate the amount you expect to receive and use that amount on your tax return. If the reimbursement amount differs from what you expected, you may have to make an adjustment to your return in the year you actually receive the reimbursement. If you are not sure whether part of your casualty or theft loss will be reimbursed or recovered, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed or when you have a reasonable estimate of the amount of reimbursement. http://www.irs.gov/pub/irs-pdf/f4684.pdf

If you are in a federally declared disaster area, other rules apply. See the Federal Disaster Losses section for more information on when to deduct these losses. “The Mobile Tax Man” financial services office will be able to assist you in preparing these returns.
http://www.irs.gov/newsroom/article/0,,id=149524,00.html

Personal Casualty or Theft Gain
You may have a gain if you receive more in reimbursement than the basis of the destroyed or damaged property:

  • If you receive similar property as reimbursement, a gain generally does not need to be reported.
  • If you receive unlike property or money as reimbursement, you may have to pay tax on the gain.
  • If the gain results because your principal residence was destroyed, you are allowed to treat it as if you had sold your residence and can exclude up to $250,000 ($500,000 if Married Filing Jointly) if you otherwise meet the conditions for the exclusion.

Generally, you can choose to postpone all or part of the taxable gain if. To do so, you must purchase similar property within two years of realizing a gain from the casualty or theft.

If you are in a federally declared disaster area, other rules apply. See the Federal Disaster Gains section for more information on how long you can postpone a gain.

Disaster Area Losses 
You are in a disaster area if the president of the United States has announced your area was part of a federally declared disaster. If this occurs, you have a choice of which year you may claim the loss:

  • You may claim the loss for the year in which it occurred if you file your current-year tax return by the due date (with extensions)
  • You may amend your prior year tax return by filing Form 1040X, Amended U.S. Individual Income Tax Return, and claim losses in the previous tax year. Specify the date or dates of the disaster and the city, town, county, and state where the property was damaged or destroyed on your amended return. Write the disaster's name in red ink on the top of the return.
  • You may claim the loss as an increase to your standard deduction for tax years beginning January 1, 2009. 

By amending your prior year return when the disaster occurs, you can get your refund for the loss sooner than waiting until the following year. However, you should compare your tax situation and adjusted gross income for both years to determine if it is to your tax advantage to claim the loss in one year rather than another.

If your home is located in a disaster area and your state or local government orders you to tear it down or move it because it is no longer a safe place to live, the resulting loss in value is treated as a casualty loss from a disaster. For you to deduct the loss, the order must have been issued within 120 days after the area was declared a disaster area.
http://www.irs.gov/newsroom/article/0,,id=149524,00.html

Your net disaster area losses do not need to be reduced by 10% of your adjusted gross income.  Net disaster area losses are the balance of all personal disaster losses minus all personal casualty gains.

The IRS may postpone for up to one year certain tax deadlines of taxpayers who are affected by a federally declared disaster. The tax deadlines the IRS may postpone include those for filing income, excise, and employment tax returns, paying taxes associated with those returns, and making contributions to a traditional IRA or Roth IRA. If the IRS postpones the due date for filing your return and for paying your tax and you are affected by a federally declared disaster, the IRS may abate the interest on underpaid tax that would otherwise accrue for the period of the postponement. The IRS will publish announcements in your local area and on the IRS web site if they postpone any tax deadlines in your area.

Federal Disaster Gains
Special rules apply if your home is located in a disaster area. Some of these rules include:

  • Unscheduled Property - Any insurance proceeds you receive for unscheduled personal property in your home are not taxable. Unscheduled property is anything in your home not listed separately on your insurance policy, such as furniture or clothing.
  • Other Property - Other insurance proceeds from damage to your home and its contents are considered for a single item and are lumped into a single sum. The proceeds may result in a taxable gain if the amount is greater than your loss. If the amount of insurance or other reimbursement exceeds the amount you paid for similar replacement property purchased within the replacement period, you may recognize a gain that is considered taxable income.
  • Replacement period - Instead of the usual two years, the law provides for a four-year replacement period for replacing a principal residence damaged in a disaster area.

Renters receiving insurance proceeds for damaged or destroyed property qualify for similar relief if their rented home is their primary residence.

Reimbursement
A reimbursement is a money payment specifically allocated to replace or repair the property through insurance or other IRS-approved methods. Reimbursements may reduce the amount of loss you may claim on your return. The following qualify as reimbursements:

  • Insurance
  • The part of a federal disaster loan that you are not required to pay back
  • Court-awarded damages minus legal fees and other necessary expenses
  • Repair, restoration, or clean-up services provided by relief agencies like the Red Cross
  • Condemnation awards
  • A theft loss paid by a bonding company
  • Grants and other payments you receive to help you after a casualty.


Please note, grants and other payments are considered reimbursements only if they must be used specifically to repair or replace your property. For example, payments from an employer's emergency disaster fund that are earmarked for restoration or replacement of damaged property are considered reimbursements.

If individuals such as your neighbors, friends, or relatives give you cash and do not place restrictions on how you should spend the money, these cash gifts are not included in your income and they do not reduce the amount of your casualty loss.

Food, medical supplies, and other forms of relief assistance you receive do not reduce your casualty loss, unless the assistance replaces your lost or destroyed property.

Reimbursements that exceed your losses or exceed the additional expenses you incur because of the casualty or theft may have to be included in income.

For example, the house Mary rents was damaged due to a tornado. Her town is not designated a disaster area. Her insurance company determined it was not safe for her to live in the house until the roof, walls, and carpeting are repaired or replaced, so the insurance agent has approved a $3,000 payment for temporary housing expenses. This reimbursement does not reduce her casualty loss, because it is not a payment made to repair or restore property. Belinda moves into an apartment for four months while the house is being restored. Her rent is usually $900 per month, but she must pay $1,100 for rent for the apartment because it is a short-term lease. The $800 additional rent expense she incurred [($1,100 apartment rent - $900 house rent) 4 months] is considered a tax-free reimbursement. Mary also had to stock up on groceries again and spent $300 more than she normally would have. The apartment is farther away from work, so she paid $40 more in gasoline than she normally would have. The remaining $1,860 reimbursement ($3,000 - $800 - $300 - $40) should be included as income on Belinda's return. Her insurance company also reimburses her for the personal property contained in the rental house that was damaged. Her reimbursement for the various pieces of furniture totaled $5,000. When she calculates the casualty loss on her return, she must reduce her loss by this reimbursement. Any reimbursement in excess of her loss should be included as income on her return.

If you are in a federally declared disaster area, different rules apply. See the Disaster Relief Grants and Payments section for more information on how long you can postpone a gain.

Disaster Relief Grants and Payments
Do not include post-disaster grants received under the Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. Any losses or expenses that are specifically reimbursed by these disaster relief grants cannot be used in determining the amount of your casualty or theft loss. Unemployment assistance payments under the act are considered taxable unemployment compensation.

Individuals who are disaster victims generally do not have to pay taxes on certain assistance payments they receive. This exclusion from income applies only to expenses compensated by assistance payments that are not otherwise compensated for by insurance or other sources.

A qualified disaster relief payment includes any amount paid to or for the benefit of an individual that is either:

  • A reimbursement or payment for reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster
  • A reimbursement or payment for reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for the repair, rehabilitation, or replacement is attributable to a qualified disaster
  • A payment made by a federal, state, or local government, agency, or subsidiary, in connection with a qualified disaster, in order to promote the individual's general welfare.

A qualified disaster must be one of the following:

  • A disaster that results from a terrorist or military action
  • A federally declared disaster
  • A disaster resulting from any event that the Secretary of Treasury determines to be of a catastrophic nature
  • A disaster that is determined by an applicable federal, state, or local authority (as determined by the Secretary of Treasury) to warrant assistance from the federal, state, or local government, agency, or subsidiary.

Therefore, taxpayers in a disaster area who receive grants from state programs, charitable organizations, or employers to cover medical, transportation, or temporary housing expenses do not include these grants in their income.

 

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Last Updated on Monday, 01 March 2010 02:30
 

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