This Tax Tip Spotify Podcast and/or WordPress Blog Post understands you suffered severe damage as a result of the recent [storms, tornadoes, hurricanes, droughts, fires, etc.]. You may be eligible for a deduction on your tax return as a result of your losses. The amount you can deduct generally depends on whether the damaged property was business, income-producing, or personal-use property.
You can claim losses relating to personal-use property (such as your home or personal-use vehicle) only as an itemized deduction on Schedule A of your Form 1040. The deduction for casualty losses of personal-use property (i.e., property that is neither used in a trade or business nor held for the production of income) is subject to a $100 reduction rule and a 10 percent reduction rule. Under the $100 reduction rule, each casualty loss is reduced by $100. Under the 10 percent reduction rule, the total of all casualty losses are reduced by an amount that equals 10 percent of your adjusted gross income.
If you and your spouse file separate returns, you must each reduce each casualty loss by $100. Similarly, the 10 percent reduction rule applies separately to each of your returns.
Losses on business property (other than employee property) and income-producing property are not subject to these limitations. For a casualty loss relating to property used in a trade or business or held for the production of income (such as rental property), the amount of your loss is generally equal to (1) the lesser of your adjusted basis in the property before the casualty, or the decrease in fair market value of the property as a result of the casualty minus (2) any insurance or other reimbursement you receive or expect to receive. However, if business or income-producing property is completely destroyed, the decrease in fair market value is not considered.
If a single casualty involves more than one item of property, you must calculate the loss on each item separately, and then combine the losses to determine the total loss from that casualty. If leased property is damaged or destroyed, your loss is the amount you must pay to repair the property, minus any insurance or other reimbursement you receive or expect to receive.
Unfortunately, the cost of repairing damaged property is not part of a casualty loss. Neither is the cost of cleaning up after a casualty. The cost of protecting property against a casualty is also not part of a casualty loss. Thus, for example, any amount spent on insurance or to board up a house against a storm is not part of your casualty loss. If the property is business property, these expenses are deductible as business expenses.
If you receive an insurance payment or other reimbursement that is greater than your adjusted basis in destroyed or damaged personal-use property, you will have a personal casualty gain. The amount of the gain is the excess of the amount you receive over your adjusted basis in the personal-use property at the time of the casualty. The amount received includes any money, plus the value of any property you receive, minus any expenses you incur in obtaining reimbursement. It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property.
As you can see, there are many issues to consider in completing a tax return in a year in which a casualty loss occurs. Please call me at your earliest convenience so we can discuss your individual situation and review the documentation we will need for your return so that we can take full advantage of the deductions you are due.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 04302021 320-240)