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Natural Disasters and Casualty Gains and Losses

tax
Posted by Lisa M. Parente Posted on Nov 07 2022

When a natural disaster occurs, the IRS provides guidance on claiming casualty gains and losses on your damaged property.

If the amount of reimbursement received from a disaster, such as insurance proceeds, exceeds your adjusted basis in the destroyed property, you are required to report a casualty gain on your tax return. Alternatively, if you do not receive adequate reimbursement for your damaged property, you may be eligible to claim a casualty loss on your tax return.

Casualty gains are reported in the tax year in which reimbursement is received, which may or may not be the year in which the disaster occurred.

The IRS allows for two options by which a taxpayer may claim a casualty loss in the event of a federally declared natural disaster. An individual that incurs a casualty loss as a result of a federally declared disaster area may claim the casualty loss on their tax return for the year in which the loss occurs, or on the previous year’s tax return. As it relates to Hurricane Ian, taxpayers have the option to claim a casualty losses when filing their 2022 tax return during 2023, or by amending their 2021 tax return to claim it against last year’s income. The deadline to amend your 2021 tax return to claim a casualty loss incurred during 2022 is October 16, 2023.

Example 1 – Casualty Loss: Jeremiah owns a vacation home and accompanying land on Florida’s Gulf Coast, which was damaged by Hurricane Ian. Jeremiah acquired the property during 2018 for $400,000. Jeremiah’s adjusted basis and fair market value in the property immediately prior to the Hurricane were $400,000 and $750,000, respectively. Immediately after the Hurricane’s damage, the fair market value (FMV) of the property decreased to $150,000. In order for Jeremiah to repair the property back to its original adjusted basis of $400,000, he spent $200,000. Jeremiah was ineligible for flood insurance, and therefore received no insurance proceeds related to the disaster. Jeremiah’s casualty loss is calculated as follows:

Step 1:

$400,000

Adjusted Basis in Property

 

 

$750,000

FMV Immediately Before Disaster

(150,000)

FMV Immediately After Disaster

$600,000

Loss on Property from Disaster

                

 

                               

 

 

The casualty loss calculation then continues by taking the lesser of the adjusted basis in the property or the loss on property from disaster.

Step 2:                                                              

$400,000

Loss (smaller of two numbers)

            (0)

Insurance Proceeds

$400,000

Net Loss

        (100)

Limitation on Casualty Loss

$300,900

Net Casualty Loss

 

 

 

 

 

The final step in the calculation then limits the deductible amount of the casualty loss based on the taxpayer’s adjusted gross income (AGI). For this example, assume Jeremiah’s  AGI is $180,000.

Step 3:                                                

$180,000

AGI

         10%

Percentage Allowed

$  18,000

Allowed Casualty Loss Deduction

             

 

 

The total casualty loss deduction for Jeremiah is $18,000, the lesser of the allowed casualty loss deduction and the net casualty loss.

Example 2 – Gain: Using the same fact pattern as Example 1 above, assume that Jeremiah received $450,000 of insurance proceeds. The calculation is as follows:

$400,000

Adjusted Basis in Property

(450,000)

Insurance Proceeds

  $50,000

Net Gain

 

 

 

 

 

Jeremiah reports a long-term capital gain, because the property was owned longer than one year, on his tax return for the year in which the disaster occurred.

If you have questions or would like further information as to how natural disasters can impact your taxes, please consult your tax advisor. Neitzel Luke & Salopek Inc. is available to answer any questions you have. We can be reached at (440) 835-1040 or email us at LParente@nlacpas.com to get into touch.

The information contained within this communication is not intended to serve as tax advice, and is not intended to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under federal, state, or local law.