For my Texans: Casualty Losses 101
The following is a breakdown (a la En Vogue, but by the time I'm done, you're gonna get it). I'll cover the basics of casualty losses as they specifically relate to the personal victims of Hurricane Harvey and how you can potentially FILE FOR TAX REFUNDS NOW by filing amended returns for 2016. IRS publication 547 covers casualty losses in detail so I will provide the highlights hoping that it will give enough information to decide if you have experienced a casualty loss and how to proceed.
What is a casualty loss as it relates to Hurricane Harvey?
A casualty loss is a deductible property loss that you can claim on your tax return. Casualty losses occur when property is damaged, destroyed or lost due to a disaster (in this case Hurricane Harvey and the ensuing floods) AND you suffer a net financial loss. For example, if your home was damaged in the storm, you have experienced a casualty. You have experienced a casualty loss if the smaller of the cost basis or the fair market value exceeds any reimbursement (insurance or otherwise) you have received for that loss.
Let me explain the math using a television as an example (it's a bit simpler than a house): if you purchased an HDTV last year for $800, that is the cost basis of the TV. One year later, the day of the loss, fair market value (FMV) of that TV is $600. You receive an insurance reimbursement of $200 for the TV. For the purposes of deductible casualty losses, you would consider the smaller of the cost basis or the FMV, which in this example is the $600 fair market value of the TV. You then subtract the $200 reimbursement from the FMV and end up with a casualty loss of $400.
The calculations for FMV can be quite specific depending on the type of property and how the loss occurred (in the case of Harvey, there are specific guidelines for federally declared disaster areas).
Are there limitations for the kinds of personal property that a loss can be claimed for?
Almost any type of personal property is eligible for a casualty loss claim from bicycles to VCRs. There are some specific exclusions which are as follows: family pets, items burned in an intentionally set fire (don't rid yourself of destroyed household goods in a bonfire...could cause issues), willfully negligent car accidents and progressive deterioration (damage from steady operation...in other words, if you have damage, claim it now and don't wait for it to get progressively worse over time).
What information do I need to prove I had a loss?
The following are required to claim a casualty loss:
- The type of casualty (car accident, fire, storm, etc.) and when it occurred
- That the loss was a direct result of the casualty
- That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage
- Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
I lost everything. Can I just claim one large casualty loss or do I have to breakdown every item that was damaged, destroyed or lost?
Unfortunately, every item for which you want to claim a casualty loss has to be figured separately. This is obviously a daunting task but I don't expect that the IRS will ease this rule in any future issuances of Harvey Relief. As a roadmap, please see IRS publication 584. It is essentially a workbook with many items written in to give you a template for where to begin.
When can I claim the casualty losses I incurred due to Harvey?
There's some good news here! While IRS guidelines generally mandate that disaster losses must be claimed in the year they occurred, the IRS has granted relief and will allow the losses to be claimed either on your 2017 return OR on an amended 2016 return. The best approach takes some diagnostics of your individual tax situation, however, filing an amended 2016 return could be advantageous if you paid tax in 2016. You can amend the return to include the casualty loss and generate a refund. You would get a refund check/direct deposit essentially recouping taxes you already paid for 2016. If you choose to amend your 2016 return, you have 6 months form the date of the loss to file the amended return containing the casualty loss.
There you have it...the basics of casualty losses as they apply to Hurricane Harvey. I believe this is enough for most to decide if they are in a position to claim a casualty loss. My thoughts are with all those who were victim to this behemoth storm. Hopefully this provides you with some information that can be of use as you being to rebuild.
Information contained within is subject to change and should always be confirmed with your tax professional prior to use.
Resources/Sources (some are duplicates in intra-text links):
Adam Ditsky, CPA
President, Ditsky Strategic