Monday, March 3, 2014





Income Tax reporting may not be high on your priority list right now.  Casualty Loss Rules are a particularly complex part of the Internal Revenue Code.  Here are Tax Tips and a Checklist to consider as soon as possible—before making major decisions about rebuilding your home, replacing property, and filing your tax return.  This is not a complete list of all the issues and details you will need to address when reporting your situation on a tax return.

 ΓΌ  1. Find out whether the event that damaged or destroyed your property was a Federally Declared Disaster.  A federal disaster declaration is an official ruling that triggers special tax rules.

      2.  Pictures are worth a thousand words. 

__ Pre-Loss photos of your home and personal property (contents) are often your best source for documenting important details of your losses.  Ask friends, family and co-workers to share any pictures they may have from social events, meetings or holidays gatherings at your home. 

__ Post-Loss photos of damaged and destroyed property are also extremely important.  Take lots of “wide-angle” and “detail” photos before and during clean-up or debris removal.  And make sure to take “before and after” photos of repairs, rebuilding, and/or restoration work.

      3.  Document, Document, Document.  For property that was damaged or destroyed in the disaster:

a)     Photocopy or scan paperwork as follows (if you do not have these documents, contact escrow/title company, contractors, dealers for duplicate copies):
__ Acquisition Cost of all Real Property (Purchase Settlement Statement)
__ Additions & Improvements (Invoices for Labor & Materials)
__ Vehicles (Purchase Contracts)

b)     Regarding the Personal Property/Contents, gather [but do not photocopy] and list the Purchase Date, Manufacturer/Make, Model, Description, Original Cost, Estimated FMV Just Before Disaster, and Cost to Replace.  This list will be also useful for preparing your insurance claims.
__ Contents by Room for Furniture only; and
__ Other Contents by Type:  Clothing, Electronics, Cameras, Sporting Equipment, Antiques, Jewelry, Artwork, etc.

c)      Insurance policies (homeowners, vehicle, etc):  Retain the following information (as received): 
__ Your policies, policy declaration pages
__ All documents generated in the insurance claim process: correspondence, reports, estimates, and insurance proceeds/checks (including detailed breakdown)
__ Immediately after each conversation with insurance company personnel, write down details of points discussed. 

These documents should be organized by insurance policy categories: A-Dwelling; B-Other Structures; C-Contents; D-Additional Living Expenses (“ALE”); Trees/Shrubs/Landscaping, Items “scheduled” in the insurance policy with specific coverage amounts; Vehicles and other property.

d)     Additional Living Expenses (ALE):  list Date, Description, and Cost of temporary housing, excess auto mileage (maintain a log of miles driven “post-disaster” to compare to miles driven “pre-disaster”), utilities, food (possibly), counseling, medical & professional fees, moving expenses.

e)     Recovery & Repair Expenses:  list Date, Description, and Cost of debris removal, clean-up, temporary and permanent repairs & replacements.

f)      Post-Disaster Financial Support:  list all the money you received from FEMA, other government sources, non-profit organizations, lawsuits, and potential Hazard Mitigation programs.


Tip #1:  Consider setting up a separate checking account for disaster-related expenses.
This account would be different from a construction account your lender might set up to dole out insurance funds as repairs/rebuilding progress if you have an outstanding home loan.

Tip #2:  Do Not Rush to Deduct a Loss on your past or current year’s tax return
before there is a “Closed Transaction” and a settled outcome.
You may not have received all the proceeds from insurance, government aid, or legal settlements.  You may not have identified all of the damage and therefore will not know the true amount of your losses for a period of time. 

Tip #3:  Keep an eye on that April 15 deadline.
Although no special “disaster survivor” exception exists for long-term delay to file your annual tax returns, under some circumstances the IRS allows 90 to 120-day automatic extensions for filing some tax returns that are otherwise due near or at the time of a disaster.  It is imperative that you fulfill the normal tax return filing process.  Depending on your personal financial situation, you may elect to “note” that your gain or loss status is presently unknown.

Tip #4:  Professional appraisals of your home and valuables are very useful.
This is particularly true if you are underinsured and believe the amounts you will recover from your insurance will be less than the “cost basis” of your property.  A qualified real estate appraiser can help you prove the pre and post-loss value of your home and help you make a decision on replacing it by buying elsewhere versus rebuilding.  Appraisals of high value personal property items “just before” and “just after” the loss are also particularly helpful if you anticipate insurance shortfalls for those items.  Special IRS rules apply to these appraisals.

Tip #5:  If a Government agency issues an “Order to Demolish” your property within 120 days of the
declaration of disaster, that order will be relevant to your casualty loss computations.
The additional loss resulting from that order will be treated as if it were part of the original loss and not a separate event.

Tip #6:  The IRS uses a different method than most insurance companies use
to value a personal property “casualty loss.”
A list of damaged property prepared for insurance purposes [3(b) above] is useful to determine a “casualty loss” for tax purposes, although the values will differ.

Tip #7:  Business & Investment property losses are treated somewhat differently
for tax purposes than Personal Use property losses. 
Special IRS rules, restrictions, and benefits apply only to Business and Investment property disaster losses.

Tip #8:  Special IRS Rules regarding Disasters Losses

a)     In October 2016, IRS rules changed regarding the year in which a loss may be deducted to give more flexibility to the taxpayer. 
b)     Although insurance proceeds/grants/gifts to reimburse losses of your personal property (related to a primary residence) are not subject to taxation even if they cause a gain or potential gain, these proceeds must still be considered in calculating deductions for losses on your tax return.

JOHN TRAPANI 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.  

© 2014, John Trapani, CPA,
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.


Certified Public Accountant

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Thousand Oaks, CA 91362

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It All Adds Up For You

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.

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