OTHER DISASTER APPRAISAL QUESTIONS
If you have read a number of the posts and pages on this blog you have noticed that I have a strong opinion regarding the process of determining a disaster loss, specifically the values before and after the disaster event. See lines 5 and 6 of the personal loss calculation on IRS Form 4684:
“Line 5 Fair market value before casualty or theft”
“Line 6 Fair market value after casualty or theft”
The difference between line 5 and line 6 is a key factor in determining a loss. The economic loss is the excess of line 5 over line 6 before insurance and other adjustments.
There are two ways to compute the economic loss, the “Appraisal Method” and “Cost of Repairs Method.” I have told blog readers in that the “Cost of Repairs Method” should be avoided except in a few situations.
The “Appraisal Method” is usually the better choice. But there are rules that need to be attended to.
An anonymous comment was recently left on one of my posts related to valuations, “Why is the Cost of Repairs Method of Loss Valuation not the one to use?” (5/27/2011 Post). The comment ends in a request, but since there was no way to contact the person who left the comment, I will answer the question here. The full comment follows:
Would an assessment by a Realtor who ran comparable comps after a house disaster help determine FMV?
Or would Expenses incurred with the accrual repayment of the full insurance claim work?
Having everything completed by tax filing date is almost impossible when dealing with land damage. Would we have to amend the taxes back after expenses are completed? Is this possible after an audit as started?
Thanks in advance.
First, in specific response to the person who left the comment and others in similar situations:
Your home has apparently experienced severe damage. I understand the pressure that you are under. Your life has been completely disrupted. The home that was not just your castle, it was an anchor, a place where everything was familiar. It was a place where you knew where everything was located. Your home was a place of unique personal and family experiences. If you wanted a glass of water, you knew where the sink was located; the clean glasses were in the cabinet near the sink and reached quite easily and automatically. That feeling of ease and familiarity has been destroyed. It is not just the financial loss; it was the devastation of the familiar being taken away from you that hurts the most. The neighborhood has been affected. The memory of the experience will be with you for a long time to come as it stays with me. From my experience of the 1994 Northridge Earthquake the memories are still fresh. You are now in a “club” that you did not apply for and did not want to be initiated into. Keep your emotional strength up, your resilience is the most important asset that you have and need at this time of recovery.
Here are the questions to be addressed:
What qualifies as an “appraisal?”
How does an insurance adjuster’s evaluation impact your need for a professionally prepared appraisal?
What are the timing issues and the reporting requirements?
(The comment was left April 27, 2013, the person has either filed the 2012 tax return or has applied for an extension.)
It is important to take the time you need to get it right. A knowledgeable tax professional will help and should be able to answer these questions in relation to your specific situation. One thing is certain, file your returns when they are due (including extensions applied for). There are people who I have helped who thought that because the tax code allows for a 4 year replacement period they had 4 years to file tax returns. You cannot wait 4 years to file a 2012 return. In the United States we report our tax situation on an annual basis. The returns are due, for individuals, on April 15th, October 15th if you have requested an automatic extension. When you need to file a return for a year in which you experienced a disaster is still subject to the absolute deadlines. The reporting process incorporates the fact that the financial aspects of the event may go on for a number of years. The information is still reported on an annual basis, reporting what is known through the year. While tax filing may be extended, the payment of any tax liability is due April 15th.
The insurance adjuster provides an estimate of what it will take to compensate the insured for the damage suffered. Remember, insurance adjusters work for the insurance company; they are paid to minimize the insurance company’s exposure. Why do you think they are called adjusters?
After the Northridge Earthquake, an adjuster told a neighbor:
“Well, a little paint and wallpaper and we will have you back in your home in no time.”Don’t we want to believe that would be true? The neighbor’s home had lifted completely off the foundation and came back down out of proper alignment in addition to it no longer being anchored to the foundation. The house was eventually “Red Tagged” making it uninhabitable. It was completely torn down and rebuilt after the land was re-compacted. The adjuster’s evaluation may be greater than your insurance coverage. But in many situations the adjuster stops calculating the loss when the insurance coverage limit is reached.
Hire your own experts.
The insurance adjuster’s evaluation is not an appraisal.The IRS does allow the evaluation of an SBA appraiser to qualify as a qualified appraisal, but the SBA has its own agenda. The SBA wants to get you back into your home, but they don’t want to burden you with a big loan to repay, so they might cut corners on what you may want to do to restore your property. The SBA is usually interested in the three S’s, Safe, Secure and Sanitary. Restoration to what was there before the disaster is probably more expensive than simply “Safe, Secure and Sanitary.”
Therefore, the SBA appraisal is probably low.
This leaves us with the question: What is an appraiser?
By definition, qualified appraisers prepare appraisals. If your loss is less than $30,000, a formal appraisal may not be needed; it would not be a waste. But if it is greater than $30,000,, the cost of a professional appraisal is worth the price. See my post on appraisals, April 5, 2013,
“APPRAISAL VALUATION ISSUES IN A CATASTROPHIC LOSS SITUATION.”
The fine points of a disaster appraisal that I discuss in that post are important concepts that the appraiser must be aware of and understand.
MY PERSONAL STORY
Dealing with the confusion, the new requirements and contacts can be overwhelming. I know the situation well and I had an advantage, a long professional background in taxes, being able to spend 14 months studying the details in the tax code, and being able to investigate the tax aspects of the situation. While the personal interaction with a knowledgeable tax professional provides clarity and reduces stress, I have placed a lot of information on this blog with the hope that it will improve the quality of disaster income tax reporting.
If you have specific questions, it is ok to post the question on the blog, but also sending me an email (John@TrapaniCPA.com). It will make it possible to create an opportunity for an individualized conversation.
This blog, “AccountantForDisasterRecovery.com” has been addressing taxpayer income tax issues related to catastrophic losses for five years
All rights to reproduce or quote any part of the chapter in any other publication are reserved by the author. Republication rights limited by the publisher of the book in which this chapter appears also apply.
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It All Adds Up For You
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.
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© 2013, John Trapani, CPA,