P of R Disasters


The contents of this material prior to this point applies to all casualty and involuntary conversions. There are additional provisions that apply where the federal government has made a declaration that the catastrophic event is a Federal Disaster.

The Process:
The federal government may determine that an incident qualifies as a federal disaster area. Generally, these are major losses. People who experience a Federal Disaster are able to realize financial and tax benefits provided by various agencies of the federal government.

The income tax “benefits” are different for those who realize a gain and those who realize a loss.

Deferral of many federal tax filing, compliance and enforcement actions due dates for tax matters not directly related to the loss are extended under IRC Section 7508A.

Year to Deduct Loss:
Taxpayers may claim the loss on the tax return for the year of the loss or the return for the year immediately preceding the year of the loss.

This allows taxpayers who experienced the actual loss in 20x1 to deduct the loss on their 20x1 income tax return or their 20x0 (the preceding year) return. Where the 20x0 return has already been filed, an amended return may be filed. Generally, the amended return must be filed no later than April 15, 20x2 for 20x1 disaster losses claimed on a 20x0 tax return. No extensions are permitted.

An Order to Demolish:
An order to demolish the remaining improvements issued within 120 days of a disaster event which would increase the loss can be included as part of the original loss. This is especially useful if the order to demolish occurs in a year subsequent to the original loss.

Non Itemizers
For taxpayers who don’t itemize deductions on Schedule A of Form 1040, Congress passed legislation that allows these taxpayers to add to their standard deduction the net amount of the disaster casualty loss.

GAINS (Involuntary Conversions)
The tax on the gain can be deferred just as it can be deferred for non-disasters with additional benefits.

Personal property (contents)
In non-disasters, contents are the most difficult aspect of a casualty loss. In the case of a catastrophe such as a fire that consumes the whole home including all contents, it is almost impossible to determine all the relevant data to make an intelligent determination of a gain or loss. In the case of a federally declared disaster only, the insurance proceeds received for personal property do not have to be reported and no computation of gain for tax purposes need be determined. This does not preclude claiming a loss if the insurance proceeds are less than the adjusted cost basis of the personal property lost.

“Qualified Replacement Property” for Real Property and Scheduled Property
The rules concerning reinvestment of insurance proceeds also apply. What is “Qualified Replacement Property” (QRP) is expanded.

The proceeds received for the personal use primary home structure and “scheduled personal property” are considered a common pool of funds that may be reinvested in otherwise qualified replacement real property defined as personal use land and structure as well as scheduled property. Additionally, general household contents also qualify for inclusion in this amount.

Replacement Period
The number of years is four years not two years for computing the reinvestment period.

The provisions above applicable to primary personal residence losses apply to losses of business and investment  properties lost in federally declared disasters.

There is a unique provisions for involuntary conversion disaster gains as there are for primary personal residences as described above. Below are the special rules for business and investment property.

The rules for replacement property are applied somewhat differently than those for personal use real estate. The rules for disasters discussed in section 25 above do not apply to business losses.

In the case of business and investment property, “qualified replacement property is defined as:
“Tangible property of a type held for productive use in a trade or business”

This means that if you have lost your business property in disaster, you can replace it with any business property. This is an expansion of the usual replacement rules. However, as this also applies to investment property, allowing the replacement of investment property with business property. If the taxpayer want to replace the investment property with other investment property, then that taxpayer would simply apply the general rules. For business and investment property the replacement period remains two years.

The IRS has a number of useful booklets for taxpayers who experience a catastrophic physical event. The IRS has combined a number of these separate publications in two publications,
2194 for individuals and 2194b for businesses.
The booklets can be accessed on the IRS website at www.irs.gov.

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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(805) 497-4411       E-mail John@TrapaniCPA.com

Blog: www.AccountantForDisasteRrecovery.com

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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
© 2011, 2012 & 2013, John Trapani, CPA,