Disaster Losses as Tax Deductions

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 “This Post Has Not Been Updated to Include Changes from the “Tax Cuts and Job Act” passed on December 22, 2017.”

2017 has brought more than its fair share of disasters. From hurricanes to hail storms, tornadoes to wild fires, it is claimed that this year has had the 2nd most natural disasters on record. Once people make it safely through the ordeal and start putting their lives back in order, thoughts turn to the financial side effects of the clean-up, rebuilding and loss of property that has happened.

What Are the Tax Issues Involved When Dealing with a Disaster?

The first issue that must be determined is the number of dollars you can deduct due to loss of property. Your loss is the lesser of your basis in the property (what you paid for it plus any improvements made to it less any possible depreciation claimed) or the fair market value of the property before the disaster happened. You then subtract from that amount the value of the property (if any) after the disaster and/or any insurance money you received for the property. An example of how to figure this:
A building you own was partially damaged by a tornado. You paid $20,000 for the building. A person with knowledge of real estate determined that the building was worth $30,000 before the tornado and only $10,000 afterward. Your insurance company gave you a check for $5,000 for the damages. Your loss of property would be calculated as $20,000 (your basis, as this was less than the fair market value) minus $10,000 (the value of the building after the disaster) minus $5,000 (your insurance proceeds). $20,000 - $10,000 - $5,000 = $5,000 loss.
 

How to Report What You Lost in a Disaster?

Now that you have determined your loss, the next issue is how to report it. There are two different ways a disaster loss could be reported. The way you report it depends on what you used the property for. If you used the property for business or investment, it gets reported as a capital loss. If the property was personal and not used for business or investment, there is another level of calculations. First, you combine all losses from the disaster that are personal. Then you subtract $100 from that total. From there you also need to subtract 10% of your Adjusted Gross Income from that total. What is left can be used as an itemized deduction on Schedule A.
No matter if the loss is from business/investment property or personal property, these calculations are performed on Form 4684. This form has one section for personal property, the second section for business/investment property, and the third section for losses not related to disasters

 

What Happens if it Becomes a Federally Declared Disaster?

If the disaster is severe enough, many times the government will proclaim it to be a federally declared disaster area. If this happens, you have the option of amending your prior year tax return with your loss numbers so that you get your money faster. Otherwise, you would wait and include it on the return you would file in the next calendar year.

The key to all of this is to maintain good records. You will need to know the original purchase price of the items affected by the disaster plus any improvements made to them since the original purchase, less any depreciation taken. Remember that if a disaster strikes your home, many of the records could be lost or destroyed, so make sure you have some sort of backup plan to be able to recover and prove your numbers.

 

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Disclaimer – Descriptions provided in this article are presented as generalities. There are many factors not listed above which may impact the deductibility of disaster losses. This article should not be considered legal or tax advice. For advice on a specific transaction, please contact the AgriSolutions Tax department at taxes@agrisolutions.com .

 

Written By

Tim Gradert

Tim Gradert

Tax Manager

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