Sep 01, 2020
By Mike Mesch, CPA/ABV, ASA, CFF Partner at Terry Lockridge & Dunn
President Trump signed a Federal Disaster Declaration for 16 counties in Iowa on August 17, 2020 in relation to the derecho that came through the state on August 10. The signing of this Declaration allows those in the affected counties to deduct qualified casualty losses on their Federal income tax return, without having to itemize on Schedule A. The information below is derived from IRS Publication 547 for use in preparing 2019 returns, as well as the IRS Disaster Resource Guide for Individual and Businesses Publication 2194.
What qualifies? To deduct a disaster casualty loss, you must be able to prove you incurred a loss and, if so, then calculate the amount of loss.You must be able to show all of the following:
- That you were the owner of the property, or otherwise contractually liable to the owner for the damage.
- The type of casualty and date of occurrence.
- The loss was a direct result of the casualty.
- Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Some types of losses that are not generally covered by your insurance will be allowed for this deduction. It is recommended you file an insurance claim, even if you know it will be declined, in order to show proof that there is no reimbursement expected from insurance.
How do you calculate the loss deduction amount? Here are the steps:
- Determine your adjusted basis in the property before the disaster. In doing this calculation on personal-use property, the entire property (including any improvements, such as building, trees and shrubs) is treated as one item.
- Determine the decrease in fair market value (FMV) of the property as a result of the disaster.
- From the smaller of the amounts determined in 1 and 2 above, subtract any insurance or other reimbursement you received or expect to receive.
Items to consider in figuring the decrease in FMV. Fair market value is the price at which you could sell you property to a willing buyer when neither of you have to sell or buy and both know all the relevant facts. The decrease in FMV 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 disaster. FMV 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 FMV.
The cost of repairing damaged property, or cleaning up after a disaster, is not part of the casualty loss. However, if all of the following conditions are met, you can use these costs as a measure of the decrease in FMV:
- The repairs are actually made.
- The repairs are necessary to bring the property back to its condition before the casualty.
- The amount spent for repairs is not excessive.
- The repairs take care of the damage only.
- The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty.
The cost of restoring landscaping to its original condition after a disaster may indicate the decrease in FMV. You may be able to measure your loss by what you spend removing destroyed or damaged trees and shrubs, minus any salvage received, pruning and other measures taken to preserve damaged trees and shrubs, and replanting necessary to restore the property to its approximate value before the disaster.
There are several safe habor methods available for determining casualty losses, but they are beyond the scope of this article.
When to deduct the loss? If you suffered a qualified disaster loss (a federally declared disaster that occurred in an area warranting public or individual assistance, or both), you can elect to deduct the loss on your 2020 return, or your 2019 return. If you elect to include on your 2019 return, the loss is treated as having occurred in that year. The amount of your calculated qualified disaster loss deduction must be reduced by $500 when figuring your tax deduction.
The information provided in this article is not all-encompassing on this topic. If you would like to discuss your specific situation, please reach out to Mike at firstname.lastname@example.org or any of the accountants at Terry Lockridge & Dunn. They may be reached in Cedar Rapids at 319-364-2945 or in Iowa City at 319-339-4884.