Millions of people have been affected by the two most recent hurricanes, Harvey and Irma. Although taxes are probably the last thing you want to be thinking about when you are in this situation, you can actually get tax money back from the federal government if you “deduct uninsured and unreimbursed casualty losses from a disaster on your tax return” according to Consumer Reports. Let’s start with what qualifies as a casualty loss.
IRS Definition of Casualty Loss
On the IRS website under Topic Number: 515—Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas), “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.” In terms of the latter, an example provided by Investopedia details a perfect example of a situation where you cannot claim a casualty loss. They state:
“A couple owns a house that is perched on a cliff, along with the rest of the neighborhood, overlooking the city. Unfortunately, erosion causes several houses adjacent to their property to collapse and fall over the cliff. Their property remains undamaged, however, and city building officials allow them to continue living there. When they try to sell their house three years later, they discover that the value of their house has dropped by a whopping $150,000 because of buyer hesitancy stemming from the public’s negative perception of the property due to the catastrophe. They are forced to sell their house for $175,000 less than they paid for it. Neither this loss nor the losses sustained by the homeowners whose houses collapsed are deductible.”
Under this section, the IRS also explains that if the property in question is for personal use or is not completely destroyed, your casualty loss will be 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. In the event that your property is actually a business or income-producing property, and it is unfortunately completely destroyed, the loss is your adjusted basis.
How You Can Claim the Loss
Only the owner of the property may deduct the loss. To claim your casualty or theft losses, you must claim them using the FORM 1040, Schedule A as an itemized deduction. If the property is for personal use, you are required to deduct $100 from each casualty or theft event that has occurred during the year after subtracting salvage value, insurance, or reimbursement. Once you have done this, you add up all of these amounts and subtract 10% of your AGI, adjusted gross income, which will give you your allowable casualty and theft losses. To report your casualty and theft losses, you use FORM 4684. Section A is for personal property while section B is for business or income-producing property.
When Can You Claim the Loss
Typically, you can claim the loss in the year that it occurred. However, there is an exception if you live in an area declared a disaster area by the president. In this case, you may claim the loss in the year before the disaster occurred. If you have already filed your tax return, you can amend it after you have determined your losses. However, keep in mind that theft losses that you are planning to claim are not eligible for the disaster area exception. For more information on how to claim casualty losses on a personal property, you can read the IRS Publication 584. For a business or income-producing property, you can read the Publication 584-B and will help you claim the losses on the FORM 4684.