How to Claim a Casualty Loss when in a Federal Disaster Area

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Feb 01, 2021

casuality loss.jpgAs you begin to gather information to prepare your 2020 income tax returns, there are some important items that warrant your attention if you lived through one of the federal disasters (Iowa Derecho, California, and surrounding state wildfires, etc.).

The most important thing to note is that you may be able to take a disaster casualty loss on your personal residence, IF you have proper documentation.

  • You have to first make sure you are in a Federally declared disaster area
  • Submit your claim to insurance
    • While this is not required to claim a casualty loss, it could support your loss claim and prove if insurance proceeds were received or not. In addition, an insurance company will send an adjuster who can provide an estimate of the costs to restore your property.
  • Have your repairs completed and keep track of your expenses, including insurance deductible, and any other out of pocket costs
    • If you cannot have your repairs completed in the 2020 tax year, then:
      • Get ONE estimate of the cost to repair – this works as substantiation of the casualty loss as long as the total repairs are estimated to be less than $5,000
      • Get TWO estimates of the cost to repair – this works as substantiation of the casualty loss as long as total repairs are estimated to be less than $20,000
      • If your casualty loss is greater than $20,000, you should have a binding contract with a contractor prior to year-end. The work can be completed in the future, but the expense can be taken on your 2020 tax return as long as the contract is binding
      • You can also substantiate the loss with a professional real estate appraisal (but this is often the costliest method)
  • When determining your casualty loss, you should keep an exhaustive list of the expenses incurred as a result of the disaster. Then, at tax time, you can review with your advisor to determine what is deductible.

Note: You are only able to take the casualty loss in the year of the disaster (2020 tax year), or there is an election that can be made to amend your 2019 tax return to take the loss in that year. Talk with your accountant to determine if it makes sense to take this loss on your 2019 amended tax return.

Special Note for Businesses

Businesses must keep track of all clean-up and repair expenses as well as any insurance reimbursements. If the repairs are not completed in tax year 2020 but insurance has been received, your tax advisor will need to prepare an election to delay recognition of the insurance proceeds as income for the year. This election will allow you to offset the insurance proceeds with actual expenses incurred within two years of January 1, 2021.

For additional information, consult your tax advisor. The accountants at Terry Lockridge & Dunn can be reached in Cedar Rapids at 319-364-2945, or in Iowa City at 319-339-4884.

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