Question: My wife and I lost our house during Hurricane Sandy. We paid $350,000 for it many years ago and, over the years, put in approximately $150,000 in improvements. We are waiting for the insurance company to finalize our settlement. Will we be able to deduct anything on our tax return?
Answer: This goes under the heading of a Casualty Loss. Calculating the loss is both simple and difficult at the same time. In your case, we are dealing with a natural disaster related casualty loss. First, we must determine the amount of the loss. Generally, the loss is the lesser of the adjusted basis of the property immediately prior to the casualty event or the decrease in the property’s Fair Market Value due to the casualty.
The adjusted basis is the total of the purchase price for the property plus any associated costs plus the cost of any improvements as of the time of the casualty. It does not include any costs to repair or replace the property. You can combine the land and improvements as a single item. The decrease in Fair Market Value can be determined by the cost of the repairs made and the clean up of the property to restore it to original condition. To claim the decrease as your casualty loss, the actual payments must be made.
Your Casualty loss would be the $350,000 (less value of land when purchased plus your original closing costs) plus $150,000 reduced by any insurance reimbursement on the property. If you have insurance you must file a claim in order to get the deduction. If an insurance reimbursement is expected, but has not been finalized, the anticipated reimbursement must be included in your calculation. If the insurance reimbursement is different, you can amend the return.
If the insurance proceeds exceed the adjusted basis of the property, a taxable involuntary conversion exists and either a tax has to be paid or you can reinvest the insurance proceeds into a replacement property and defer the involuntary gain.
Living expense reimbursements do not affect the loss computation.
Once you have arrived at your Casualty Loss, you then subtract $100 per occurrence and 10% of your Adjusted Gross Income (AGI). This net amount is recorded as a Casualty Loss Deduction on your tax return under Itemized Deductions with no phase-out provisions.
There is a special Federally Declared Disaster Area rule, which allows you to elect to deduct the loss on the return for the immediate prior year of the loss. This election, as well as every other issue concerning the Casualty Loss should be discussed with your tax professional.
Roy I. Levine, CPA/CGMA is a Tax Partner at Levine, Jacobs & Company, L.L.C., Livingston, NJ. He can be reached at firstname.lastname@example.org