Casualty, Disaster, and Theft Losses

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Casualty losses can result from the destruction of, or damage to your property from any sudden, unexpected, and unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.

If your property is not completely destroyed or stolen, or if it is personal-use property, determine your loss from a casualty by first figuring the decrease in fair market value of your property as a result of the casualty event. To do this, you must determine the fair market value of your property both immediately before and immediately after the casualty. An appraisal is the best way to make this determination. Compare the decrease in fair market value with your adjusted basis in the property. The adjusted basis is usually the cost of the property plus or minus certain adjustments. From the smaller of these two amounts, subtract any insurance or other reimbursement you receive or expect to receive. The result is your loss from the casualty. For more information about the basis of property, refer to Basis of Assets, or refer to Publication 551, Basis of Assets.

If your business or income-producing property is completely destroyed or stolen, the decrease in fair market value is not considered . Your loss is the adjusted basis of the property, minus any salvage value and any insurance or other reimbursement you receive or expect to receive.

If the property was held by you for personal use, you must further reduce your loss by $500 for losses incurred after 12/31/07 and before 1/1/2010. This amount returns to $100 for losses incurred after January 1, 2010. This reduction for losses of personal-use property applies to each casualty or theft event that occurred during the year. The total of all your casualty and theft losses of personal-use property must be further reduced by 10% of your adjusted gross income, UNLESS the loss occurred in a federally declared disaster area. In that case, the 10% of AGI reduction is waived.

In figuring your loss, do not consider the loss of future profits or income due to the casualty.

For more information regarding casualty losses of personal-use property and how to deduct them, refer to Casualty and Theft Losses and Publication 547, Casualties, Disasters, and Thefts.

Casualty losses are generally deductible only in the year the casualty occurred. However, if you have a deductible loss from a disaster in a federally declared disaster area, you can choose to deduct that loss on your tax return for the year immediately preceding the year of the casualty. If you have already filed your return for the preceding year, the loss may be claimed in the preceding year by filing an amended return, Form 1040X (PDF) (Form 1120X for corporations).

Generally, you must make the choice to use the preceding year by the due date of the current year's return, without extensions. For example, the election to deduct a 2004 disaster loss on your 2003 return must be made on or before the due date (without extensions) of the 2004 return. This is April 15, 2005, for calendar year individuals and March 15, 2005, for calendar year corporations. You can revoke this choice within 90 days after making it by returning to the IRS any refund or credit you received from making the choice. If you revoke your choice before receiving a refund, you must return the refund within 30 days after receiving it for the revocation to be effective.

If your main home, or any of its contents, is damaged or destroyed as a result of a disaster in a federally declared disaster area, do not report any gain due to insurance proceeds you receive for unscheduled personal property, such as damaged furniture, that was part of the contents of your home. Any other insurance proceeds received for the home or its contents can be treated as being received for a single item of property. Any replacement property you purchase that is similar or related in service or use to your home or its contents is treated as similar or related in service or use to that single item of property. You can choose to recognize gain only to the extent that the insurance proceeds are more than the cost of your replacement property. If you choose to postpone any gain from the insurance proceeds you received, the period for purchasing replacement property is four years after the close of the first tax year in which any gain is realized.

Renters qualify to choose relief under these rules if the rented residence is their main home.

If your home is located in a federally declared disaster area and your state or local government orders you to tear it down or move it because it is no longer safe to live in, the resulting loss in value is treated as a casualty loss from a disaster. Figure your loss in the same way as any other casualty loss of personal-use property. This order must be issued within 120 days after the area is declared a disaster area.

If your loss deduction is more than your income, you may have a net operating loss. You do not have to be in business to have a net operating loss from a casualty. For more information, refer to Publication 536, Net Operating Losses.

Casualty losses are claimed on Form 4684 (PDF), Casualties and Thefts. Section A is used for personal-use property and Section B is used for business or income-producing property. If personal-use property was destroyed or stolen, you may wish to refer to Publication 584, Casualty, Disaster, and Theft Loss Workbook, to help you catalog your property. If the property was business or income-producing property, refer to Publication 584B (PDF), Business Casualty, Disaster, and Theft Loss Workbook.

The IRS may postpone for up to one year certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster. The tax deadlines the IRS may postpone include those for filing income, estate, gift, generation-skipping transfer, certain excise, and employment tax returns, paying taxes associated with those returns, and making contributions to a traditional IRA or Roth IRA.

If the IRS postpones the due date for filing your return and for paying your tax and you are affected by a federally declared disaster area, the IRS may abate the interest on underpaid tax that would otherwise accrue for the period of the postponement.


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