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Hurricane Harvey and Hurricane Irma have rocked the southern states over the past weeks. Hundreds of thousands of people are returning to find their homes and businesses damaged, even destroyed. They may be able to use casualty deductions to offset some of the loss, but only if they can provide documentation.
U.S. taxpayers are entitled to casualty deductions on their federal tax returns when they suffer certain kinds of loss. According to the IRS, a casualty is the "damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected or unusual." This could include man-made disasters like car accidents, vandalism, or terrorist attacks, as well as natural disasters like tornadoes, earthquakes, and hurricanes.
Generally, taxpayers must deduct a casualty loss in the year it occurred. But when a federally-declared disaster results in damage, you can also claim the loss in the preceding year by filing an amended tax return. When a home or business is destroyed it can result in substantial losses. You may not be allowed to claim them all at once. By amending the prior year's return, taxpayers can get a larger tax benefit, including cash back to help them rebuild.
Whenever you suffer a casualty loss from a hurricane or other natural disaster, you may deduct the qualifying loss from your income (up to a certain limit). To compute the amount of the loss, you and your accountant will need to calculate:
You are allowed to deduct the smaller of either the change in fair market value or adjusted basis, minus any reimbursements or insurance payouts, up to the deduction limits. In order to do so you must first determine what your property was worth before the damage occurred, and what effect of the disaster had on its value. How this is done depends on the type of property involved.
According to NPR, Hurricane Harvey damaged more than 100,000 houses. Then, Hurricane Irma blew through the Caribbean and Florida, flooding Jacksonville and sending 6.3 million residents for shelter. Many of those residents will be returning to storm damage and billions of dollars of repairs.
To establish casualty deductions for your home you will need to prove its fair market value before the natural disaster struck. Often, this is done with an appraisal. If you recently purchased or refinanced your home, the title company, bank, or real estate broker may still have copies of documents that show what the property appraised for at the time. If you have lived in your home for an extended time, the current property tax statement could also give you a rough estimate of your property's fair market value. However, you may need to hire an appraisal company to provide a more accurate home valuation based on the sale of comparable homes before the hurricane struck. It can also account for any home improvements or build-outs you have made to your property.
Then, you have to show your loss. You can do this by taking photos or videos as soon after the disaster as possible. You can also provide invoices for the costs of repairs. You can use written statements from friends and family who saw the house before and after the damage was done to support your claim.
The fair market value of a vehicle is comparatively easy to prove. Online and print resources like Kelley's Blue Book, Edmunds, and the National Automobile Dealers Association, provide indexes of what different cars, trucks, and motorcycles are worth on a regular basis. You can also contact your dealer for a copy of your purchase contract.
Proving the loss looks very similar between homes and vehicles. Take pictures, get repair invoices, and document what improvements you had made to the vehicle. Because many states have mandatory auto insurance, you may also be able to use your insurance adjuster's estimate of loss, though that number may be lower than your total loss.
Usually, homes and vehicles account for the bulk of a person's casualty deductions. But the actual loss is often overshadowed by the personal property contained within them. While homes and vehicles usually come with insurance policies to cover repairs, personal property falls into broad categories. Without a careful proactive inventory it can be nearly impossible to be compensated for everything you have lost.
In reconstructing your personal property losses, look for photos and videos of holidays or social gatherings in your home. Make sketches of each room that was impacted, listing out what was stored in each drawer, cabinet, and shelf (don't forget about storage areas like garages, sheds, attics, and basements). Go back through your checking account, credit card records, and online retailer histories to document recent purchases.
To determine what these properties were worth before the hurricane, use online resale websites to search for similar items. If you were a collector, search those databases for the value of your damaged collections. It is a long and tedious process, but you cannot be compensated for anything that does not have a value assigned to it.
Business owners have even more work to do to recover after a natural disaster. In addition to their personal homes and property, they must establish the effect of the hurricane on their business. Some parts of this mirror the personal process, such as valuing the business's real property and determining the value of lost furniture or equipment in the office. Businesses likely also lost inventory and revenue, which must be documented using patterns of purchases or deposits from suppliers and financial institutions. Because these numbers can be harder to pin down, business owners are advised to seek professional help in assessing their casualty losses.
There are no easy answers after a hurricane damages your property. But there is relief to be had. Filing for casualty deductions can minimize your tax burden and amended returns can give you access to cash so you can begin the rebuilding process.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding casualty deductions or the tax consequences of a natural disaster, contact Joe Viola to schedule a consultation.