Realty Times September 24, 1999

Floyd's Ravages Could Be Tax-Deductible
by Broderick Perkins

To the extent that insurance or other forms of compensation don't cover the cost of Hurricane Floyd's storm and flood damage and destruction to your property and its contents, you may be eligible for a ''casualty loss'' deduction.

A casualty loss deduction is based on the decline in the fair market value of a property due to damage or destruction by a sudden, unusual or unexpected event, including a fire, flood or earthquake -- and most mudslides and landslides.

In the Eastern Seaboard's federally designated disaster areas, taxpayers can choose to take the deduction on 1999 tax returns next year or this year by amending your 1998 tax return with Internal Revenue Service Form 1040X.

Because casualty loss deductions are often large sums and involve complicated tax calculations, you should seek the help of a knowledgeable tax professional to complete your return.

Calculating loss

You can keep the figures as accurate as possible, however, by using IRS Form 4684 ''Casualties and Thefts'' and by following these steps:

  • First, calculate the actual value of the property before the disaster and subtract its value immediately after the disaster. For instance, if your home was worth $400,000 before the damage and now it's worth $300,000 the difference is $100,000.

  • Compare that amount to the "adjusted basis" of the same property -- your purchase price, plus any improvements made before the storm. If you purchased the house in 1970 for $40,000 and added $10,000 in home improvements, your basis is $50,000.

  • Use the lesser of the adjusted basis or the cost to rebuild the house to compute the taxable loss. Based on our example, that amount would be $50,000. Even if your home is destroyed, you are only eligible for a deduction based on the lesser of the two amounts as explained above.

  • From that figure, subtract any benefits from your insurance company, disaster related grants or financial assistance.

  • Multiply your adjusted gross income by 0.10 (10 percent), and subtract that amount from the loss or adjusted basis.

  • Finally, subtract $100 from the subtotal. The amount remaining is the casualty loss you may claim.

    "If a casualty loss relates to business-use property, including rented property, there is no $100/10% deduction," said Sam Gilstrap, an enrolled agent with Saratoga Tax in San Jose, CA.

  • As is the case with deductions for mortgage insurance and property taxes, casualty loss is an itemized deduction included on Schedule A. Those deductions on Schedule A are subtracted from your adjusted gross income.

  • It's likely some casualty losses will generate a negative income. In that case, you can elect to carry that loss back two years (and amend past returns) or forward for up to 20 years to reduce your past or future income and the taxes you pay. This again stresses the importance of hiring competent help to complete your return.

    "If he doesn't make the election, the net loss is carried back two years and forward 20," said Gilstrap.

    Original value

    To calculate your home's value, you should have retained records of your property's value and any home improvements or related documents. Your initial purchase contract, property tax records, home-improvement contracts and a detailed inventory of your possessions all help establish the before-disaster value of your property.

    A visual record, say photographs or a video tape of the property before it was damaged, helps confirm those documents.

    Periodic appraisals or comparable sales reports from REALTORS® or Web sites like HomeValueCheck can help you keep track of your home's value. Tracking your value is also useful for maintaining adequate insurance coverage as well.

    Damaged value

    After your home is damaged or destroyed, photograph or video tape the damage, before you begin the clean up and get a certified appraisal.

    The cost of the appraisal is deductible in the year paid as a miscellaneous item, subject to a reduction based on two percent of your adjusted gross income.

    Also, obtain a professional's estimate of what it would cost to repair the damage. Remember this figure is based only on what it will cost to return your home to its condition before the damage.

    Repair and upgrade?

    The estimate does not include additional improvements you might consider now that the back of your home has been washed out to sea. Ask your tax consultant about the wisdom of performing improvements while you are filing for a casualty loss.

    Remember, insurance benefits and federal emergency grants will reduce your casualty loss. The cost of disaster-related loans, emergency cleaning and repairs could increase it.

    If you have items covered by insurance and you elect not to submit it for benefits, you cannot make the casualty loss claim.

    All insurance and related proceeds must be used to repair or replace your property.

    "Otherwise you can have a taxable gain to the extent that any reimbursement funds were not used for repair or replacement," Gilstrap said.

    Always store all related records, and any important documents, or copies of them, away from the home, perhaps in a safe-deposit box or other relatively disaster-proof location.

    IRS Publication 547 ''Casualty, Disaster and Theft'' offers additional details for calculating your loss.

    With your state return, attach copies of the federal Schedule A and related casualty-loss forms and worksheets. Contact your state tax office for state tax regulations on casualty losses.

    Additional Information:

    Federal aid for Floyd victims on its way in seven states. Here are the counties eligible for relief in Delaware, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, and Virginia, plus preliminary damage estimates.

    Insurance company phone numbers for Floyd-related claims can be found by clicking here

    Editor's Note: This is PART IV of a four part series running this week on Hurricane Floyd and its impact on issues regarding homes, mortgages, and tax relief.

  • Part I: Floyd Brings Out Mortgage Relief
  • Part II: Check Home's Major Structures First
  • Part III: Inspect Home's Smaller Systems

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