How to qualify for casualty loss deductions
If the national weather forecasters are right, we could be in for a brutal winter in many parts of the country. And even in areas that will not be especially hard hit, you still may suffer damage to your home or other personal property. Small consolation: At least you may be able to claim a casualty loss deduction to offset part of your tax liability.
Basic rules: A taxpayer qualifies for a casualty loss deduction if the damage is caused by an event that is “sudden, unexpected or unusual.” This includes not only natural disasters—like severe winter storms—but also automobile collisions and frozen pipes bursting. The same basic rules apply to thefts of property. However, you cannot claim a deduction for damage occurring over a long period of time, such as damage occurring from a drought.
The deductible amount depends on whether the property damaged is personal or business. For personal property, the deduction is limited to the excess above 10% of your annual adjusted gross income (AGI) after subtracting $100 for each casualty event.
Example: Your AGI for 2014 was $100,000, and you suffered a loss to your home of $15,100. In that case, your deduction is limited to $5,000 ([$15,100 − $100] − [10% of $100,000]).
In contrast, there are no tax law limits for business property. The full amount of the eligible loss may be deducted on your company’s 2014 tax return.
The amount of the loss eligible for the deduction is the lesser of (1) the difference in the property’s value before and after the casualty and (2) the adjusted basis in the property. But you must reduce the deductible amount by any proceeds you receive from your insurance or the government.
Faster results: If you own damaged property located in an area that is officially declared a “federal disaster area,” you may be entitled to a quick tax refund. In that case, you can elect to deduct your casualty loss on the tax return for the prior year.
In other words, if you suffered a loss in a federally designated disaster area this year, you can obtain tax relief on the 2014 return you will file by April 15, 2015. If you file your 2014 return without making the election, you can file an amended return to recoup your losses more quickly.
Be aware, however, that the IRS often challenges casualty loss deductions. The best proof you can offer is photographs or videotapes of your property as it currently exists. In other words, obtain documentation before a casualty occurs. The visual proof can be compelling when coupled with snapshots of the property immediately after a casualty occurs.
To further support your position, you should obtain an independent appraisal of the damage. The appraisal itself is deductible as a miscellaneous itemized deduction, subject to a floor of 2% of AGI.