Casualty Losses
Personal Property
Those affected by the recent floods may qualify for casualty loss deductions. These losses are reported on Form 4684, Casualties and Thefts. The loss is limited to the lesser of cost or decrease in FMV of property, less insurance proceeds or other reimbursements.
There are various methods to determine the amount of the loss or decrease in fair market value. The first method is an appraisal of the property (before and after the loss). Secondly, one could use the cost of cleaning up or making repairs to property. The following conditions must be met in order to use the “cost of cleaning up or making repairs”:
- Repairs are actually made
- Repairs are necessary to bring the property back to its condition before the casualty
- Amount spent for repairs isn’t excessive
- Repairs take care of the damage only
- The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty.
The deductibility of losses on personal-use property is limited to the following amount for each loss event:
Loss – $100 – (10% X Adjusted Gross Income)
For example:
Your loss after insurance reimbursement is $10,000. Your AGI for the year of the loss is $85,000. Your first apply the $100 rule and then the 10 % rule.
- Loss after insurance $10,000
- Subtract $100 per incident ( 100)
- Loss after $100 rule 9,900
- Subtract 10% * $85,000 AGI ( 8,500)
- Casualty Loss Deduction $ 1,400
If 10% of your AGI exceeds your loss after insurance reimbursement, you do not have a deductible casualty loss.
Business or Income Producing Property – Casualty Loss
Property completely destroyed
For business or income-producing property, including rental property, that is completely destroyed, the decrease in fair market value is not considered. Your loss is figured as follows:
Your adjusted basis in the property
Less any Salvage Value
Less any insurance or other reimbursement you receive or expect to receive
Loss of Inventory
If you have a loss of items held for sale to customers, you can deduct the loss through an increase in cost of goods sold, including any insurance reimbursements related to the lost inventory in gross income.
Business property – not completely destroyed
If your business property was damaged but not completely destroyed, your casualty loss would be the smaller of the decrease in Fair Market Value (FMV) of the property or the adjusted basis in the property before the casualty less any insurance reimbursement. For example: a truck used for business sustained damage from flooding; the insurance company reimbursed $3,000 (the cost to repair the truck (the assumed decrease in FMV), less the deductible of $1,000);the basis of the vehicle was $10,000.
- Adjusted basis in the truck before the flooding $10,000
- Decrease in FMV $ 4,000
- Amount of loss (lesser of line 1 or 2) $ 4,000
- Less insurance reimbursement ( 3,000)
- Business Casualty Loss Deduction $ 1,000
If a single casualty involves more than one item of property, you must figure the loss on each item separately. Then combine the losses to determine the total loss from that casualty.
Gains from Casualties
Please be aware that gains can result if insurance proceeds exceed the adjusted basis of the property before the casualty.
When can I claim this loss?
The President has declared that a major disaster exists in the State of Louisiana due to the recent flooding events. This declaration allows you to claim casualty losses on either your 2015 tax return or on your 2016 tax returns. If you filed your 2015 return already, you can file an amended return to claim the losses. See the link below for more information.
https://www.irs.gov/taxtopics/tc515.html
Please do not hesitate to contact us if you need assistance with tax matters related to the recent flooding.