A federally declared disaster is a disaster that took place in an area declared by the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. A list of areas warranting public or individual assistance (or both) is available at the Federal Emergency Management Agency (FEMA) web site at www.fema.gov.
A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. If you experience damage to personal, income-producing, or business property, you may be able to claim a casualty loss deduction on your tax return.
The Disaster Tax Relief and Airport and Airway Extension Act of 2017 and the Bipartisan Budget Act of 2018, provide special tax relief for taxpayers impacted by certain federally declared disasters that occurred in 2016 and 2017. IRS Publication 976, “Disaster Relief”, provides detailed information.
The Tax Cuts and Jobs Act of 2017 changed the deductibility rules for personal casualty losses. Personal casualty losses incurred after December 31, 2017 must be due to a federally declared disaster. IRS Publication 547, Casualties, Disasters, and Thefts, will address this change for 2018.
Effective October 13, 2016, the due date for making an election to deduct a loss attributable to a federally declared disaster in the tax year immediately before the tax year in which the disaster occurred has been extended by six months. The period for revoking the election has also been extended to 90 days after the due date for making the election.
If you have already filed your return for the preceding year, you can claim a disaster loss against that year’s income by filing an amended return. Individuals file an amended return on Form 1040X. If you elect to deduct your loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster loss happened, include a statement saying that you are making that election. The statement can be made on the return or can be filed with the return. The statement must include the name or a description of the disaster giving rise to the loss, the date or dates of the disaster, and the city, town, county or parish, state, and ZIP code where the damaged or destroyed property was located at the time of the disaster.
If you claimed a deduction for a disaster loss on the tax return for the year in which the disaster occurred and you wish to deduct the loss in the preceding year, you must file an amended return to remove the previously deducted loss on or before the date you file the return or amended return for the preceding year that includes the disaster loss deduction.
To determine the amount of your casualty loss you must:
- Determine your adjusted basis in the property before the casualty
- Determine the decrease in fair market value of the property as a result of the casualty
- From the smaller of the amounts you determined in steps one and two subtract any insurance or other reimbursement you receive or expect to receive
Your adjusted basis in a property is generally what you paid for the property, increased or decreased, as a result of certain events. If you acquired the property in some other manner such as inheriting it or receiving it as a gift, you must figure your basis in a different manner. IRS Publication 551, Basis of Assets, explains how to figure your basis.
Fair market value is the price at which you could sell your property to a willing buyer when neither of you have to sell or buy and both know all the relevant facts. The decrease in fair market value used to figure the amount of the casualty loss is the difference between the property’s fair market value immediately before and immediately after the casualty. Fair market value is generally determined through a competent appraisal. Absent a competent appraisal the cost of cleaning up or making certain repairs is acceptable under certain conditions as evidence of the decrease in fair market the section in Publication 547, entitled “Figuring a Loss,” for situations in which cost of repairs may be used.
Remember to subtract any insurance or other reimbursements that you received, or that you expect to receive, from the smaller of the adjusted basis or the decrease in fair market amounts to arrive at your casualty loss.
For more disaster, related information, log onto the IRS web site at www.irs.gov and enter “disaster” in the search box.
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