Today I want to talk about the tax impact from personal casualties, disasters and thefts. What we will talk about today is personal losses only. Business or income producing losses have different rules. So let’s get started.
I THINK THE RULES FOR THIS CHANGED FAIRLY RECENTLY RIGHT?
They did. Starting in 2018, the rules for casualty losses were narrowed and now include only certain losses
WHAT LOSSES NOW QUALIFY?
The losses that qualify now are personal casualties that are sustained in a federally declared disaster area. In the past, most other casualties qualified, but now it is limited.
I AM SURE THERE IS A DEFINITION OF CASUALTY RIGHT?
There is. The loss has to be from an identifiable event that is sudden, unexpected, or unusual. Even if your loss happens in a federally declared disaster area, it may not qualify if the loss was from a gradual or progressive event. Let’s say that the interior of your home has mold or some other issue and it has been a problem for years. Just because you live in an area that had a federally declared disaster, it does not mean the repairs to these areas are deductible.
WHAT TYPES OF LOSSES WOULD NOT QUALIFY?
In most cases, car accidents, vandalism, and shipwrecks would not qualify. Earthquakes, fires, floods, and storm damage would not qualify unless they are in a federally declared disaster area.
HOW IS THE LOSS AMOUNT DETERMINED?
The loss is figured by taking the lower of the basis in the property (how much you paid for it plus improvements) and the decrease in the fair market value.
So if you purchased a home for $100,000 and the decrease in fair market value was $60,000, the $60,000 would be the casualty loss.
WHAT HAPPENES IF YOU GET INSURANCE PROCEEDS?
The loss that we just talked about would get reduced by those proceeds or any other proceeds that you might receive from the government or your employer. Depending on the situation this may even result in a gain if you insurance proceeds are more than your loss.
IF SOMEONE HAS A LOSS, HOW IS THE LOSS CALCULATED?
As time is running short, I will talk about deducting losses and how to pick up gains.
Each loss has to jump over two hurdles in order to be deductible on Schedule A as an itemized deduction. The first hurdle is a $100 per event reduction in the loss, but the second larger hurdle is a reduction in the loss by 10% of your adjusted gross income. So if you have 50,000 of income, the loss has to be reduced by $5,100. Any losses remaining can then be deducted.
If there is a gain, the gain is included on Schedule D as a capital gain. But the gain may be able to be deferred if out of pocket repairs will be made within two years.
We have just scratched the surface, so if you have an unfortunate event, you will want to keep good records and talk to your accountant.
Be sure to talk to one of our professionals if you have any questions regarding the casualty loss.