Casualty Loss Deductions

In the aftermath of Hurricane Sandy, we hope that you are among the lucky ones who suffered minimal damage.  However, many have incurred substantial losses as a result of the storm.  We anticipate that many taxpayers will have questions about the deductibility of losses related to damage to their homes, cars and other personal property.  Important points regarding casualty loss deductions are as follows:

  1. Losses are deductible in either 2012 or 2011.  A 2011 claim requires an amended return.
  2. No deduction is allowed for any loss that you believe will be covered by insurance.
    • If it later turns out that insurance does not cover the loss, you may claim the deduction in the year the claim is settled.
    • If you deduct the loss and are later reimbursed by insurance, the reimbursement results in taxable income in the year received.
  3. The amount of your loss is lesser of:
    • The adjusted basis of the loss property, or
    • The decline in fair value of the property as a result of the casualty.  Measuring the decline in fair value requires an appraisal immediately before and after the loss.  However, the cost of repairs is acceptable as an estimate of the loss, provided that the repairs are necessary to restore your property to the condition it was in prior to casualty and that the repairs are not excessive.

In order to protect you right to a deduction, it is important that you do the following:

  1. File an insurance claim.  If you are covered by insurance you must file a claim in a timely manner.  If you do not file a claim your loss is not deductible.  Uninsured losses are deductible.
  2. Maintain receipts and records related to clean up and repairs.  The cost of temporary housing and other incidental expenses is not included in the computation of a casualty loss.

If you have any questions, or would like additional information, please do not hesitate to call.

For more information, contact our office.

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