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Can You Benefit from a Casualty Loss Tax Deduction on Personal-Use Property?

The Gulf Coast has been hit with its fair share of natural disasters in recent years. Hurricanes, tornadoes, and floods have plagued our region, causing billions of dollars in personal and business losses. Although relief from the Federal Emergency Management Agency (FEMA) has been made available in some situations, it may not be enough to compensate for your losses and help to rebuild your life.

You may qualify for a casualty loss deduction for personal-use property on your income taxes if you are not fully reimbursed for the loss by your insurance company or another source. Since deductions reduce your taxable income, taking a write-off will minimize your tax obligation. Even so, you need to ensure that the deduction is legitimate and you are entitled to take it. There are very specific rules established by the IRS on deducting casualty losses for personal use property which are explained in Publication 547 – Casualties, Disasters, and Thefts.

The IRS defines a casualty as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Many different types of events may qualify including, but not limited to a:

  • Car accident
  • Earthquake
  • Fire
  • Flood
  • Government-ordered demolition or relocation of a home declared unsafe to use because of a disaster
  • Hurricane
  • Mine cave-in
  • Shipwreck
  • Sonic boom
  • Storm
  • Terrorist attack
  • Tornado
  • Vandalism
  • Volcanic eruption

If you qualify for a write-off you must itemize the casualty loss on Form 1040 Schedule A . You also must file the Casualties and Thefts Form 4684 with your tax return. The IRS published a Casualty, Disaster, and Theft Loss Workbook for Personal-Use Property which will help you to determine the actual amount you can write-off.

Generally, a casualty loss deduction is made in the year in which the identifiable event occurred. However, if you expect to be reimbursed for some or all your losses from your insurance company or another source, you may want to wait. Insurance proceeds reduce the casualty loss dollar-for-dollar. You need to ensure that you write-off the correct amount.

Note that if you decide not to file an insurance claim you cannot take the deduction for the portion of the claim that would have been covered by your insurance.

If you are in a federally declared disaster area, a special rule applies which may entitle you to a tax refund. You can claim the deduction in the year before the actual loss occurred which will provide you with some tax-saving relief. Instead of waiting to file your 2016 return you can amend your 2015 return to include a casualty loss deduction by filing an Amended U.S. Individual Income Tax Return Form 1040X within six months of the tax filing date (without considering extensions).

You must provide proof of the loss when you file your tax return. Include:

  • A description of the type of casualty (car accident, flood, hurricane, etc.) and the date it occurred.
  • A description of the type of casualty (car accident, flood, hurricane, etc.) and the date it occurred.Evidence that the loss was a direct result of the identifiable event.
  • Evidence that the loss was a direct result of the identifiable event.
  • Verification that you were the owner of the property, or if leased that you are contractually liable to the owner for the damage.
  • Confirmation that an insurance claim was filed in which you expect to be paid.

Taxpayers need to be aware that they might have a taxable involuntary conversion gain instead of a deductible loss if they have casualty insurance coverage. Taxpayers should consult with their tax advisor in these situations.

Although it is never pleasant to be involved in a situation where you have a casualty loss, knowing that there are options to help you should be of some comfort. For questions about whether you qualify for a casualty loss deduction, contact one of LaPorte’s tax professionals.