Casualty Loss Deduction | Charles Benway, CPA, CFP®

Posted by Charles Benway on February 22, 2016May 18, 2018

A casualty is defined by the IRS as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. For example, damage to your house caused by a tree blown over in a storm is a casualty to your house and the tree but damage to your house caused over time by termites is not and damage to your tree by Dutch Elm disease is not.

Please note: Effective in 2018, casualty losses may only be deducted if the loss was incurred in a federally declared disaster. For further information, please contact us.

Calculation of Deductible Loss

The loss is the drop in fair market value from before the casualty. Most often this is the cost of repair or replacement. First, figure the amount of the loss, then subtract any reimbursement you received. Compare that to your tax basis (usually your original cost) and use the lower figure.

Your deductible loss then depends on your Adjusted Gross Income or AGI (this is found on the bottom line of the first page of your 1040 form). Take your loss, subtract $100, then subtract 10% of your AGI. The result is your deduction. For example, a tree fell on your house causing $100,000 of damage but insurance only reimbursed you for $75,000, so your unreimbursed loss is $25,000. If your AGI is $150,000, your deduction is calculated as follows:

Unreimbursed loss	$	25,000
subtract $100		– 100
	$	24,900
subtract 10 % of $150,000 AGI		– 15,000
Amount of deduction	$	9,900

The above calculation is performed on Form 4684 and the result is then carried to Schedule A, Itemized Deductions.

There have been previous occasions when Congress passed special legislation to waive the 10% rule and allow a full deduction. At the time of this article, no such legislation has been passed.

When to claim the deduction

Normally, the deduction is claimed on the return for the year the loss was incurred. However, if the loss was due to a federally declared disaster, such as Sandy, you may file an amended return for last year and claim the deduction against last year’s income.

If you are going to amend your 2011 return, you must file it by April 15^th, 2103. Write the name of the disaster in red across the top of the amended return and the IRS will expedite the processing so you can get a quicker refund.

Reconstructing Your Records

Reconstructing records after a disaster may be essential for tax purposes, getting federal assistance or insurance reimbursement. Records that you need to prove your loss may have been damaged or destroyed in a casualty. The following tips may help to reconstruct your records to prove loss of personal-use or business property:

Personal Residence/Real Property

Be sure to take photographs as quickly as possible after the casualty to establish the extent of the damage.
Contact the Title Company, Escrow Company, or bank that handled the purchase to obtain copies of escrow papers. Your real estate broker may also be able to help.
Use the current property tax statement for land vs. building ratios, if available; if not available, get copies from the county assessor’s office.
Check with appraisal companies to locate a library of old multiple listing books. These can be used for “comps” to establish a basis or fair market value. “Comps” are comparable sales within the same neighborhood.
Check with your mortgage company for copies of any appraisals or other information they may have about cost or fair market value.
Tax records – Immediately after the casualty, file Form 4506, Request for Copy of Tax Return, to request copies of the previous four years of federal income tax returns. To obtain copies of the previous four years of transcripts you may file a Form 4506-T, Request for Transcripts of a Tax Return. Write the appropriate disaster designation, such as “HURRICANE SANDY,” in red letters across the top of the forms to expedite processing and to waive the normal user fee.
Improvements – Call the contractor(s) to see if records are available. If possible get statements from the contractors verifying their work and cost.
If a home improvement loan was obtained, obtain paperwork from the institution issuing the loan. The amount of the loan may help establish the cost of the improvements.
Inherited Property – Check court records for probate values. If a trust or estate existed, contact the attorney who handled the estate or trust.
No other records are available – Check at the county assessor’s office for old records about the property. Look for assessed value and ask for the percentage of assessment to value at the time of purchase. This is a rough guess, but better than no records at all.

Vehicles

Kelly’s Blue Book, NADA, and Edmunds are available on-line and at most libraries. They are good sources for the current fair market value of most vehicles on the road.
Call the dealer and ask for a copy of the contract. If not available, give the dealer all the facts and details and ask for a comparable price figure.
Use newspaper ads for the period in which the vehicle was purchased to determine cost basis. Use ads for the period when it was destroyed for fair market value. Be sure to keep copies of the ads.
If you are still making payments, check with your lien holder.

Personal Property

The number and types of personal property may make it difficult to reconstruct records. One of the best methods is to draw pictures of each room. Draw a floor plan showing where each piece of furniture was placed. Then show pictures of the room looking toward any shelves or tables. These do not have to be professionally drawn, just functional. Take time to draw shelves with memorabilia on them. Do the same with kitchens and bedrooms. Reconstruct what was there, especially furniture that would have held items — drawers, dressers, and shelves. Be sure to include garages, attics, and basements. Use our worksheets as a checklist of common items in each room.
Get old catalogs. These catalogs are a great way to establish cost basis and fair market value. Check the prices on similar items in your local thrift stores to establish fair market value. Walk through the stores and look at comparable items, especially items such as kitchen gadgets. Look for odds and ends you may have had but forgotten because of infrequent use.
Use your local “advertiser” as a source for fair market value. Keep copies of the issues handy and copy pages used for specific items to put with your tax records file on the disaster.
Check local newspaper want ads for similar items. Again keep a copy of any you use for comparison with the tax file.
If you bought items using a credit card, contact your credit card company.
Check with your local library for back issues of newspapers. Most libraries keep old issues on microfilm. The sale sections of these back issues may help establish original costs on items such as appliances.
Go to a used bookstore with a tape measure and the diagram of the destroyed property. Measure several rows of used books and count the number of books per shelf. Add up the prices of those books and determine an average cost per shelf. Then count the number of shelves you had in your home and multiply by the average cost per shelf. This will help determine the value of your books before the loss.

Business Records

Inventories – Get copies of invoices from suppliers. Whenever possible, the invoices should date back at least one calendar year.
Income – Get copies of bank statements. The deposits should closely reflect what the sales were for any given time period.
Obtain copies of last year’s federal, state, and local tax returns including sales tax reports, payroll tax returns and business licenses (from city or county). These will reflect gross sales for a given time period.
Furniture and fixtures – Sketch an outline of the inside and outside of the business location. Then start to fill in the details of the sketches. (Inside the building — what equipment was where; if a store, where were the products/inventory located. Outside the building — shrubs, parking, signs, awnings, etc.)
If you purchased an existing business, go back to the broker for a copy of the purchase agreement. This should detail what was acquired.
If the building was constructed for you, contact the contractor for building plans or the local planning commissions for copies of any plans.

[Source: IRS Disaster Guide Pub. 2194]