Deducting Property Loss on Your Federal Income Tax Form

Property losses from natural disasters are tax deductible. Such deductions, which are allowed for partial or total loss of personal or business property, could greatly reduce the amount of federal income taxes you owe.

Records

If you claim a theft or casualty loss resulting from a disaster you may be asked to show:

• The kind of disaster and when it occurred.
• That the damage was a direct result of the disaster.
• That you own the property.
• Your income tax basis in the property. In general, this is the original cost of the property plus the cost of any improvements before the loss, minus depreciation claimed for income tax purposes (for business and rental property).
• Fair market value before and after the disaster.
• Any insurance benefits or other compensation received, including free repairs, restoration, and cleanup from any disaster relief agencies.

Before-and-after photographs, receipts, canceled checks, deeds, purchase contracts, and professional appraisals are good supporting evidence for casualty claims.

Appraisal

If either personal or business property has been damaged extensively, have your property appraised as soon as possible. A professional estimate of value will serve as evidence for casualty loss claims. You can deduct the fee charged for the appraisal.

Itemizing Tax Deductions

If you itemize your tax deductions, you may deduct casualty losses from fire, storm, theft, or property destroyed by some sudden external force. However, you must reduce the deduction by any reimbursements or payments received to rebuild or restore property.

Specifically, you can claim a casualty loss deduction for the difference between the fair market value of the property before the disaster and after, subtracting insurance proceeds (or other reimbursements received to rebuild or restore a home), 10 percent of adjusted gross income, and $100 per disaster event. To document the before- and aftermarket value of your home, use the most recent assessed value from property taxes for the before-disaster market value and a current appraisal for the after-disaster market value.

If renters make repairs on the property or offer repayment for part of the loss, that too is considered reimbursement and must be subtracted to determine the amount of casualty loss that can be claimed. Grants or other gifts that are specifically designed to repair or replace property must be deducted as well. Homeowners who expect to receive a reimbursement will be required to make an estimate of the reimbursement and subtract it. If you overestimate the reimbursement, you can amend your casualty loss claim in another tax year.

How to Figure Deductions

The rules for figuring deductions on business or nonbusiness property losses are the same. Subtract the reduced market value after the disaster from the fair market value before disaster. For example, on personal property:

1. Fair market value before $75,000

2. Fair market value after $30,000

3. Reduction in value $45,000 (Line 1 minus Line 2)

4. Income tax basis $55,000 (the original cost of property, $40,000, plus the cost of any predisaster improvements, $15,000)

Casualty loss = $45,000 (lesser of Line 3 or 4)

The casualty loss deduction is the lesser of the reduction in value or the income tax basis. In the above example, the casualty loss deduction would be $45,000. If a business or income-producing property is completely destroyed by a casualty, special rules apply. In such cases, the loss is the income tax basis reduced by any salvage value, insurance, or other compensation. If insurance is more than the income tax basis, a taxable gain results.

Talk with your local tax representative to get advice on figuring these tax loss deductions. To file for casualty loss, use IRS Tax Form 4684 and request an instruction sheet.

Additional Resources

• Internal Revenue Service, (call 1-800) 829-3676 for forms or go to www.irs.gov for forms and publications or how to contact specific units.

• Your local emergency government office.

• The American Red Cross.

• Federal Emergency Management Agency, (FEMA is online at http://www.fema.gov).

Related publications

• IRS Tax Form 4684 and instruction sheet.

Adapted by North Carolina Cooperative Extension Service Specialists, NC State University, from University of Florida, Institute of Food and Agricultural Sciences’ Disaster Handbook
8/00—JMG