Many Florida residents, particularly those in Southwest Florida, suffered casualty losses from Hurricane Irma recently. My thoughts are with those families and individuals at this challenging time, as many of us recover from a loss of utilities, flooding, and damages to our homes and communities. Nevertheless, these tragic circumstances offer keen insight into what kinds of preparations to take care of this upcoming tax season.
IRS Form 4684 is used to report gains and losses from casualties and thefts. Casualty losses are losses from fire, theft, storm, hurricane, flood, sonic boom, earth slide, earthquake or other sudden, unexpected and unusual causes. Damage to your automobile resulting from a collision is also a casualty loss.
To qualify for the deduction, these losses usually need to be substantial. If you were significantly underinsured or had a large catastrophe deductible – for hurricane damage, for example – you may have a sizable unreimbursed property loss.
“Personal losses are claimed as an itemized deduction and are reduced by $100 per casualty event as well as 10% of adjusted gross income,” said Linda Treise, of Hughes, Snell & Company CPAs, Fort Myers, Florida.
If the casualty loss relates to your business, you can deduct the full amount on Schedule C. The amount of the casualty loss is the lesser of (1) the fair market value of the property before the casualty less the fair market value of the property after the casualty or (2) the adjusted basis of the property before the casualty happens.
According to IRS IRS IRS Publications, the definitions and guidelines for claiming income tax deductions for hurricane related casualty losses are as follows:
Disaster Area Losses – A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. It includes a major disaster or emergency declaration under the Act. See IRS Publication 547, Casualties, Disasters, and Thefts, for more information.
Casualty Losses – A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty doesn’t include normal wear and tear or progressive deterioration.
If your property is personal-use property or isn’t completely destroyed, the amount of your casualty loss is the lesser of:
- The adjusted basis of your property, or
- The decrease in fair market value of your property as a result of the casualty
If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis.
Theft Losses – A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent.
The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.
Insurance or Other Reimbursements
You must reduce the loss, whether it’s a casualty or theft loss, by any salvage value and by any insurance or other reimbursement you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation. For more information about the basis of property, refer to Topic 703, IRS Publication 547, Casualties, Disasters, and Thefts, and IRS Publication 551, Basis of Assets. You may determine the decrease in fair market value by appraisal, or if certain conditions are met, by the cost of repairing the property. For more information, refer to IRS Publication 547.
Claiming the Loss
Individuals are required to claim their casualty and theft losses as an itemized deduction on Form 1040, Schedule A , Itemized Deductions, (or Schedule A in Form 1040NR , if you’re a nonresident alien). For property held by you for personal use, you must subtract $100 from each casualty or theft event that occurred during the year after you’ve subtracted any salvage value and any insurance or other reimbursement. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year. Report casualty and theft losses on Form 4684 , Casualties and Thefts. Use Section A for personal-use property and Section B for business or income-producing property. If personal-use property was damaged, destroyed or stolen, you may wish to refer to IRS Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). For losses involving business-use property, refer to IRS Publication 584-B , Business Casualty, Disaster, and Theft Loss Workbook. These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records.
When to Deduct
Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to treat the casualty loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year. See Revenue Procedure 2016-53 for guidance on making and revoking an election under Code Section 165(i). Review Disaster Assistance and Emergency Relief for Individuals and Businesses for information regarding timeframes and additional information to your specific qualifying event. For more information, refer to IRS Publication 2194 , Disaster Resource Guide for Individuals and Businesses.
Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which you can determine with reasonable certainty whether or not you’ll receive such reimbursement.
Any money you receive from insurance, government, or other parties to compensate for the damage reduces the amount of loss you can claim on your tax return. EXAMPLE: A hurricane completely destroys your home. You purchased your home five years ago for $500,000, but the fair market value of the home before it was destroyed was $700,000. You receive an insurance reimbursement of $400,000. The amount of your loss is $100,000 ($500,000 basis less $400,000 reimbursement). Assuming your adjusted gross income for the year is $100,000, you can take a $89,900 casualty loss on Schedule A ($100,000 – $10,000 – $100).
If the property is used in a trade or business, slightly different rules apply, so it is important to ask a qualified tax preparer for assistance. If you think you might qualify for this deduction, collect all receipts, insurance statements, the police report (if appropriate) and other documentation and present it to your tax preparer to see if you qualify. And, of course, stay safe in this trying time.