We are pleased to share insights on casualty loss from our firm manager at the Yankton office, Amanda Smith, offering valuable expertise on this important topic.
A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.
Casualty losses are deductible during the tax year that the loss is sustained. This is generally the tax year that the loss occurred. Casualty losses of personal-use property are deductible only if the loss is attributable to a federally declared disaster. Personal casualty losses attributable to a federally declared disaster are subject to the $100 per casualty and 10% of your adjusted gross income (AGI) reductions.
The state of Iowa was included as a federally declared disaster for the June 2024 storms and flooding. Individuals in Iowa impacted by this would be eligible to claim a casualty loss on their 2024 1040 returns. To deduct a casualty loss, you must be able to show that there was a casualty and you must also support the amount you take as a deduction. For proof you should show the following:
- That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for damages
- The type of casualty and when it occurred
- That the loss was a direct result of the casualty
- Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery
In order to figure your casualty loss you will need the following information:
- Your adjusted basis in the property before the casualty
- The decrease in FMV (fair market value) of the property as a result of the casualty
To determine the decrease in FMV, you must look at the FMV immediately before the casualty and immediately after. To figure the decrease in FMV you generally use an appraisal. There are other options that you can use, the cost of cleaning up or making repair and a safe harbor method. Please reach out to your tax advisor for more information on this.
Remember that it is possible to have a gain from any reimbursement. The gain occurs if the reimbursement is more than the adjusted basis in the property. This is a taxable gain but can be eligible to be postponed if you purchase replacement property. If the gain is in connection with your personal residence, you typically can exclude that gain using the personal home sale exclusion ($250,000 single and $500,000 MFJ). You must meet the personal home sale exclusion requirements, owned and lived in the property for at least 2 years during the 5-year period.
So far, we have just been talking about individuals. If there is a disaster loss, individual businesses or income-producing property, corporations, S corporations, and partnerships are able to deduct losses. To be considered a disaster loss the loss has to be attributable to a federally declared disaster that occurs in an area eligible for assistance pursuant to the Presidential declaration. The loss must occur in a county eligible for public or individual assistance (or both).
Individual Assistance: Clay, Emmet, Lyon, Plymouth, Sioux
Public Assistance: Buena Vista, Clay, Dickinson, Emmet, Lyon, O’Brien, Osceola, Plymouth, Sioux
Disaster losses can be deducted in the year of the loss, or you can amend the immediately preceding tax years’ return and deduct the loss. If you have already filed your return for the preceding year, you can elect to claim a disaster loss against that year’s income by filing an amended return. You must make an election to deduct the loss in the preceding year on or before the date that is 6 months after the regular due date for filing your original return (without extensions) for the disaster year.
