The historic flooding in Middle Tennessee has caused immense property damage. Homes, vehicles, and personal property have been severely damaged or destroyed and, for many, much of the damage may not be covered by insurance. If you have suffered damage or loss to property which is not fully compensated by insurance, you may be entitled to a federal casualty loss deduction.
The rules currently in effect for casualty losses with respect to personal-use, non-business, non-income-producing property are summarized below.
Casualty loss is calculated to equal the lesser of the adjusted tax basis of the property or the decrease in the fair market value as a result of the casualty, net of any insurance proceeds received or expected to be received.
The casualty loss calculated above is then reduced by $100. This $100 reduction is per casualty event and not per item of property lost.
After the $100 reduction, you must deduct from your total casualty losses for the year an amount equal to 10% of your adjusted gross income for the year. Thus, if your adjusted gross income is $150,000, and you suffered an uninsured loss of $20,000, after the $100 deduction described above and the 10% limitation, you would only be entitled to a $4,900 casualty loss deduction.
The casualty loss is an itemized deduction. Casualty losses are not subject to the overall limitation on deduction of itemized deductions. However, taxpayers who claim the standard deduction cannot take a casualty loss deduction.
Business and Income-Producing Property
Casualty losses with respect to business and income-producing property are not subject to the $100 threshold and 10% of adjusted gross income limitations that are applicable to personal-use property. Further, if business or income-producing property is completely lost or destroyed, the full adjusted tax basis is allowed as a casualty loss deduction without the need for ascertaining the fair market value of the property prior to the casualty.
Currently, there is pending legislation that, if enacted, would extend liberalized rules for federally declared disasters that were in effect for the years 2008 and 2009. If a taxpayer’s casualty is related to the flooding in any of the Tennessee counties that have been federally declared disaster areas by the President (30 as of the date of this writing), the proposed legislation would:
Allow taxpayers who do not itemize to claim a disaster loss deduction with respect to personal-use
Remove the 10% of adjusted gross income limitation for disaster losses with respect to personal-use
Provide a 5-year net operating loss carryback for disaster losses, if the taxpayer’s losses for the year
exceed its income; and
Increase the $100 threshold to $500 with respect to personal-use property.
There can be no assurance that this legislation will pass.
How to Claim the Loss
Under current law, casualty losses, whether business or personal use, are required to be claimed in the tax year in which they are incurred. Accordingly, casualty losses resulting from the 2010 flood would be claimed on a taxpayer’s 2010 federal income tax return. If the casualty loss creates a net operating loss, it can generally be carried back two years and forward twenty years. However, individuals (and certain small businesses with respect to disaster losses) may carry back these net operating losses three years. Casualty losses are claimed on IRS Form 4684 with a taxpayer’s federal income tax return. The 2009 Form 4684 is available at http://www.irs.gov/pub/irs-pdf/f4684.pdf. For the instructions see http://www.irs.gov/pub/irs-pdf/i4684.pdf. Because it will be necessary for taxpayers to establish the fair market value of the property before the casualty and after the casualty (except in the case of completely lost or destroyed business or income-producing property) taxpayers should consider whether it will be necessary to obtain appraisals. Taxpayers should also retain all receipts related to repairs of damaged property as the cost to restore the property can be used, under certain conditions, to establish the decrease in fair market value caused by the casualty.
If the pending legislation described above is enacted, taxpayers in the federally declared disaster areas will be able to claim the casualty loss for 2009, as soon as they can establish the amount of the loss. If a taxpayer has already filed its 2009 return, it would claim the casualty loss by filing an amended return for 2009.
WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT ANY STATEMENTS CONTAINED HEREIN ARE NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY YOU OR ANY OTHER TAXPAYER, FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW.