Friday, April 5, 2013



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 the policy provisions, but where insurance is not adequate or 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.

This material summarizes the unique aspects of these specialized reports compared to traditional appraisal reports.

Summary of Requirements

Appraisals for disaster and 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.

·         The report will have two valuations.
o   The first valuation will be a ‘routine’ type appraisal, valuing the real estate “just before” the loss event. This one is based on normal conditions of recent sales. If the loss is an isolated event that only had affects on the damaged property, subsequent sales may also be used if they provide better evidence of the value of the specific property.

o   The second appraisal value is the one that can be a bit tricky. The extent of the loss will affect the way the appraiser approaches the process.

§  The easiest case is where the property improvements have been completely destroyed.
In this case the land remains and it is a mess with the residue of the destroyed improvements.

§  The more complex situation is where there is partial destruction.
How does the appraiser evaluate the affects of the partial destruction? The appraiser may rely on other experts. In a Tax Court case involving a medical building damaged in an earthquake. The appraiser noted that the rents were not affected by the damages, but based on an engineer’s report the building’s value had been impacted to the extent of the estimated cost of repairs computed by the engineer. The taxpayer was successful in this position.

§  A final possibility is where the type of damage triggers significant future building restrictions and limitations that will have substantial impact on the property’s salability.
We have seen this situation in Louisiana and in the East Coast Region affected by the 2012 hurricane and subsequent storm surge. As discussed in the text, in these instances there may be permanent decline in values due to the financial and architectural impact of building code modifications that imposes building elevation above an anticipated surge level that might affect these properties in the future.

·         There are events that may occur as a result of the loss event that will have an effect on the property’s value in the short-run but will diminish over a relatively short period of time. These are referred to a buyer resistance. In some events these will be temporary, such as in earthquakes in California; initially no one wants to live in the perceived earthquakes zone. Over time people realize that it is one of the risks of living in California and the values equalize. These temporary reductions in value due to buyer resistance are the hardest impact for an appraiser to contend with in the valuation process. In a simple situation where the improvements have been destroyed, the appraiser might simply find comparable unimproved properties that were sold prior to the event as a basis for the destroyed real estate. Of course it may become complicated where the comparables include significant, valuable vegetation such as mature old growth trees and the target property only has burnt trees and vegetation left. In most cases the appraiser may be able to find other comparables with and without the vegetation features.

·         In many cases, immediately after the damaged real property has suffered the consequences of the fire, storm or other event, there is debris that must be removed as part of the rehabilitation process. Obviously, that debris would affect the immediate value of the property. The IRS recognizes this as a valuation condition. Often the appraiser arrives after the debris has been removed or in the case of massive flooding, the walls have been stripped to the studs to keep mold from forming, making things worse. The appraiser should be provided photos of the property that were taken before the mess was cleaned up in order for the appraiser to make appropriate valuation reductions. If there have been costs incurred to remove the debris, those should be provided to the appraiser; they are possibly indication of the impact the debris had on the value immediately after the loss event.

·         There is only one Tax Court case where the IRS contested a permanent decline in value due to the event. This is usually all buyer resistance. The taxpayer won, but the amount was fairly small. We don’t know how many cases have been won by taxpayers where the permanent decline in value was not contested by the IRS or a negotiated amount was agreed to by the IRS and the taxpayer. In many instances after the 1994 Northridge Earthquake unsafe fireplace chimneys were ordered removed. Fireplaces were not banned, only the method or replacement. In some cases the replacements may have been architecturally less imposing but in most instances the owner was able to still have a working fireplace. In these cases, it is unlikely that the values were permanently impacted. In cases such as hurricanes where the municipal governments institute significant new requirements for repairs in areas that have experienced a storm surge, the repair requirements may add significant costs to the repair of the property. These costs will certainly impact what a willing buyer would pay for such a property, both in the cost of the repair and the possible physical appearance impact of the additional building requirements. It would appear that these newly required building modifications that can be traced directly back to the reactions of the authorities to the loss event create a permanent affect on the value of the property after the event, separate from temporary buyer resistance. At a minimum, if the owner has a reasonably solid estimate of the cost of complying with the new requirements that could be a starting point in the valuation impact of the requirements.

·         The appraisal should clearly state the valuation being made before the date of the event and the date of the event along with the values as of those dates. In the body of the report, at an appropriate place the appraiser should make a statement as to how buyer resistance was incorporated into the valuation of the post event amount and how debris impacted the report.

A lot depends on how the report is written. No tax professional should impose any specific value conclusions on the appraiser. However, as appraisers are not normally involved in the preparation of these specialized reports, it is not unreasonable for the tax professional to provide appropriate guidance to the appraiser on what will be expected for purposes of preparing a report that will not be meaningless in a later IRS audit.

An extensive discussion of this material is available for APPRAISERS. If you send JOHN TRAPANI an email at I will email you the PDF:

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This blog, “” has been addressing taxpayer income tax issues related to catastrophic losses for five years
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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.  
Internal Revenue Service Circular 230 Disclosure
This is a general discussion of tax law. The application of the law to specific facts may involve aspects that are not identical to the situations presented in this material. Relying on this material does not qualify as tax advice for purpose of mounting a defense of a tax position with the taxing authorities
The analysis of the tax consequences of any event is based on tax laws in effect at the time of the event.
This material was completed on the date of the posting
© 2013, John Trapani, CPA,

1 comment:

Tinh Kiều said...

This is just the kind of information that i had been looking for, thanks for sharing it!