Wednesday, January 17, 2018

Special Rules for 2017 Personal Hurricane Disaster Losses

Special Rules for 2017 Personal Hurricane Disaster Losses

If you previously downloaded the 2016 Form 4684 or the Instructions for Form 4684, please note the following changes.

The Disaster Tax Relief and Airport and Airway Extension Act of 2017 includes favorable rules for many personal casualty losses from Hurricanes Harvey, Irma, and Maria. Under the Act, you can deduct these losses whether you itemize other deductions on Schedule A or not. Moreover, your net casualty loss from these hurricanes does not need to exceed 10% of your adjusted gross income to qualify for the deduction. However, the $100 threshold limit per casualty is increased to $500.

You may be able to take many personal casualty losses from Hurricane Harvey, Irma, or Maria into account on your 2016 tax return instead of your 2017 tax return. Generally, you can elect to deduct a loss from a federally declared disaster in the tax year immediately before the tax year in which the loss was sustained by claiming your disaster loss on your original or amended return for the earlier year no later than 6 months after the due date for filing your original return (without extensions) for the year of the disaster. You can make the election to deduct these losses on your amended 2016 return on or before October 15, 2018. If you previously got a 6-month extension of time to file your original 2016 return and you are an affected taxpayer for purposes of Hurricanes Harvey, Irma, or Maria, you have until January 31, 2018 to timely file and make this election. See DisasterTaxRelief for more information on which taxpayers have been granted additional time to file through Jan. 31, 2018.  For more information on disaster assistance and emergency relief for individuals, see 

The 2016 Form 4684 and Instructions for Form 4684 are now posted at They have been updated to include calculations and other information specific to losses from Hurricanes Harvey, Irma, and Maria.


Sunday, November 5, 2017



I have never used this forum to editorialize. But I believe it is necessary now to take a stand.

2017 Republican Income Tax proposal includes a cruel provision. The tax bill eliminates the deduction for personal casualty and theft losses.

The deduction does not cost the Treasury much in any one year, but it is a real life-saver to those taxpayers who have experienced major losses. In many of these situations no insurance is even available to pay for the loss. In other cases, because the only insurance available is a government supported program, the coverage is very limited.

In 2014, the personal casualty and theft loss deduction probably cost the Treasury less than one billion dollars out of a four trillion dollar budget, (0.025%), a very small impact on the U. S, Budget, but it provides affected taxpayers with real assistance.

I recommend all taxpayers contact their Congressperson and ask them to remove the elimination of IRC Section 165 (c) (3). You may never use the deduction, but we need to think of those who will need it to survive a catastrophic loss.

Maybe by denying the deduction, Congress can continue to deny climate change.

Saturday, October 28, 2017



Here is important help when dealing with the income tax consequences of disaster recovery.

Available for the asking--based on my observations: a comprehensive guide that identifies 12 costly errors made by tax professionals who prepared Disaster-related income tax returns. Simply go to, CONTACT page, and request a free copy of “12 PERILS OF DISASTER INCOME TAX REPORTING.”

Here are the topics covered, which include cautions for tax professionals dealing with disaster income tax reporting:












12.  NET GAIN OR LOSS / §1231, “5 YEAR RULE”

Tuesday, August 8, 2017


Often an essential part of the recovery from a catastrophic event is determining the amount of a deductible loss. Where adequate insurance coverage is in place the recovery focuses on collection of proceeds based on the policy provisions. But where insurance is not adequate or not available, the possible benefits of a tax deduction can be an important consideration. A properly prepared appraisal demonstrating the decrease in the value of the property resulting from the catastrophic event becomes essential.
In addition and integral to the appraisal process, it must be noted that the appraiser’s work product may be examined by an IRS agent who is reviewing the overall casualty loss deduction claimed on taxpayers’ income tax return. Most often at that meeting the appraiser will not be in attendance; only the report will be reviewed and the taxpayers’ representative, usually a CPA or EA will be the person defending the casualty loss claim. As such it is important that the tax professional be consulted before the appraisal report is issued final. It is not the tax professional’s responsibility to impact the conclusions of the appraiser, in fact that is the last thing that the tax professional should be a part of. But a knowledgeable tax professional should be able to review the appraisal report to see where the strengths and weaknesses are that will impact an IRS review. Clarity is important and that should be the only concern of the tax professional in any review of an appraisal.
In the end the tax professional and the professional appraiser are working together to assist the taxpayer report a casualty loss claim that is sustainable as a result of an IRS review.
After a physical catastrophic event strikes the recovery process starts immediately. One important task is the valuation of the loss. To complete that job it is often necessary to call on the expertise of a professional appraiser. The significance of the appraiser’s work in these situations brings to mind certain aspects of the appraiser that are very important and aspects of the situation that the appraiser cannot be called on to provide expertise about. For example, after a fire, the appraiser can provide a pre- and post- loss set of valuations; but the appraiser should not be called on to be a forensic analyst to determine what caused the fire.
There are many aspects of the professional appraisal process that are the subjects of the professional training an appraiser takes in addition to the material referred to in this article. This article is geared to the fact that, like other professionals that are called on in these situations, the appraiser may never have been called on to prepare one of these reports.
When the appraiser is called on to prepare a report of the pre- and post- loss valuations the appraiser needs to know what the report is going to be used for. A report for insurance or property tax assessment may be different from one that is going to be used to support an income tax report. There are specific aspects of an income tax casualty loss appraisal of loss that must be understood and adhered to in order for the appraisal to have any value to the taxpayer. Ignoring the special rules may be seen as correct by the appraiser, but the result will be a useless report. In order for the report to be useful to the client, the appraiser needs to know the unique rules that must be addressed. Additionally, it is important for the appraiser to be knowledgeable about how the appraisal report will be challenged by the IRS or will require testimony in a tax court hearing.
This article relies on income tax cases that taxpayers either have been successful 0or unsuccessful in securing a tax deduction for a casualty loss deductions. Most reports that meet the IRS requirements should be accepted without any questions, some will need to be vetted in an IRS examination and only a few will see the daylight of a tax case dissection. Since the results of the unquestioned tax returns and resolved tax examinations are not available to us, we have to rely on published court opinions and IRS rulings to understand the process used to resolve disputed tax loss deduction claims.
The IRS does have very specific rules for what qualifies as an appraisal for tax purposes, however, those rules are not set out in the casualty loss sections of the Internal Revenue Code, and the rules are part of the Code and Regulation for computing a charitable contribution of an object other than cash. These rules are not covered in this article. The user is referred to IRS Publication 561, “Determining the Value of Donated Property.” On the cover of Pub 561, the IRS notes: “This publication does not discuss how to figure the amount of your deduction for charitable contributions or written records and substantiation required. See Publication 526, Charitable Contributions, for this information.” Unfortunately, the publication does not provide the specialized assistance needed for a casualty loss valuation.

John Trapani has available a book (APPRAISER’S GUIDE TO INCOME TAX REQUIREMENTS IN A CATASTROPHIC LOSS APPRAISAL VALUATION) that discusses the unique issues of casualty loss appraisals in detail. The following is a list of topics contained in that book.
The material is covered in the following topics.

Table of Topics

Topic 1
Role of Appraiser, Competence of Appraiser

Topic 2
Specific Notation in the Report by the Appraiser

Topic 3
Definition of a Qualifying Casualty Loss Event

Topic 4
Report Will Have Two Valuations. What is Being Valued?

Topic 5
Physical Damage / Identifiable Event

Topic 6
"Sudden, Unexpected, and Unusual"

Topic 7
Debris Observed or Photographic Evidence, Order to Demolish

Topic 8, 9 & 10
The following three topics are related in many ways, Obsolescence may be confused with “Market Stigma” or Buyer Resistance”. For tax purposes, they have individual issues and will be considered separately.They are split into these topics, but should be read and understood as a single topic.
Topic 8
Obsolescence and Progressive Deterioration

Topic 9
Short-term vs. Long-term Value Fluctuations (Buyer Resistance)

Topic 10
Calculating the Amount of the Casualty Loss, Post-event “Hypothetical” Costs

Topic 11
Highest and Best Use of Property

Topic 12
Recent Sales in the Area

Topic 13
Real Estate Held for Personal Use

Topic 14 
Non-Personal Use Real Estate

Topic 15 
Landscaping, Trees, Shrubs

Topic 16
“Cost of Repairs” IRS Successes in Eliminating Credibility of Taxpayer’s Appraisal

Topic 17 

Topic 18 
Words Have Meanings”



The individual topics cover cases along with IRS rulings that support the conclusions and recommendations presented in the summary.
There are traditional necessities of a professional appraisal that are not covered in this article.
When it is necessary for taxpayers to “invest” in an appraisal to determine and support a casualty loss deduction, taxpayers and tax professionals need to have an understanding of what the appraisal report should include. In a real estate appraisal, the dollar amounts will likely be significant and the demands of the Internal Revenue Service (IRS) are not necessarily known by many appraisers. As a result the appraisers may issue a “normal appraisal” as they would for a refinancing or sale. It turns out that all that content is necessary, but there are specific requirements that may not be addressed but are required in order for the IRS to consider the appraisal valid. The requirements set out in this article are the result of reviewing and analyzing IRS publications and court cases. In court cases judges add additional points that they found the taxpayer’s documentation either included that swayed their conclusion or did not include that had a negative effect on the courts’ decision process. In some cases the court brings in a requirement that simply adds to the court’s weighing of conflicting appraisals.
Appraisals for disaster and “common” casualty losses are different from the normal real estate appraisal. The qualifications of the appraiser do not change, but the report has some unique features. There are specific qualifications of the appraiser that courts use to weigh the reports prepared for the taxpayer and those prepared for the IRS.
If the deduction becomes contested in an examination, the IRS may bring in their own “expert.” There may be a major difference between the appraisal prepared by the taxpayer’s professional and the one prepared by the IRS professional. The IRS professional may suffer from not being a local appraiser; that is often held against the government’s efforts as the non-local appraiser may miss unique local conditions. The taxpayer’s appraiser should emphasize his/her specific knowledge of the local area.
In the case where the IRS adds their expert into the mix, the relative weight of the work products will often hinge on a few details that may be remotely related to the actual appraisal. The taxpayer who has secured a quality appraisal soon after the damage occurs seems to have an edge over the expert that the IRS hires; the IRS expert will prepare a report two or more years after the event, the physical aspects of the site will be different. On the other hand, the market values of the property will have that time to mature and may be in conflict with the assumptions in the taxpayer’s commissioned appraisal.
Here is a list of critical points that are discussed in detail in the book.
The development of casualty loss deduction rules related to appraisals and appraisers have settled on some prerequisites including
a)    Hypothetical” appears a number of times in the literature and when it appears it is usually a problem for the taxpayer. The IRS sees “hypothetical” as an “imaginary thought exercise” and not real. In effect the presence of the word in the report diminishes the usefulness of the report. No one believes that the appraiser has actually examined the property immediately before or immediately after the flood, earthquake, mudslide, fire, storm or “other casualty” event when the debris is still ruining the “curb appeal.” Interestingly, the IRS recognizes the physical and psychological impact of debris,

b)    “Buyer Resistance” is baked into the regulations as an adjustment that must be made to eliminate its impact on the diminished post-event value.

c)   The presence of physical damage,

d)   The damages result from "sudden, unexpected, and unusual" actions,

e)   The appraiser must consider, as a separate amount, the possible impact of Buyer Resistance,

f)    That the taxpayer was powerless to prevent the loss and within reason exerted appropriate effort to minimize the damage.

JOHN TRAPANI, CPA assists both taxpayers directly and
advises taxpayers’ tax professionals.

This material was contributed by John Trapani. A Certified Public Accountant who has assisted taxpayers since 1976, in analyzing and reporting transactions of the type covered in this material.  
© 2017, John Trapani, CPA,
All rights to reproduce or quoting any part of the entry in any other publication is reserved by the author. Republication rights limited by the author regarding this material.


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It All Adds Up For You

The contents of this blog entry represent only the understanding of the author.
Any accounting, business or tax advice contained in this entry is of a general nature and does not have any legal weight, it is not aa authoritative analysis of a specific issue, nor a substitute for a formal analysis of a specific fact situation. It cannot be considered sufficient to avoid tax-related penalties that might be assessed by a tax authority.
If desired, John Trapani, CPA  would be pleased to perform a complete research and analysis of a taxpayer’s situation.
This material was completed on the date of the posting