Tax Facts for Forest Landowners


 

Tax Facts on Casualty Losses

 

As a result of hurricanes and other storms that sweep through North Carolina, many people suffer damage to their property. The damage caused is defined as a "casualty" for income tax purposes. How to claim a casualty loss and other tax rules and regulations relating to casualties is outlined in this report.

 

1. Disaster Area Losses

Casualty losses that occurred in areas not designated as federal disaster areas are generally deductible only in the year in which the casualty occurred. Therefore, a casualty loss incurred would be deductible only on your tax return. Is there more? Yes, for casualty losses that DID occur in areas designated as federal disaster areas, one may amend last year's return. NOTE this tax rule applies to both federal and state income taxes.

 

2. Casualty losses on personal-use property

Personal-use property includes such items as a residence, a family automobile, and household furnishings. If tornado or wind damage occurred to personal-use property, the amount of the casualty loss is limited to the lesser of the following two amounts;

 

    1. The decrease in the fair market value of the property as a result of the casualty. This decrease is the difference in the fair market value of the property before and after the casualty.
    2. Your adjusted basis in the property before the casualty. The adjusted basis is generally the properties original cost plus the cost of improvements.

 

Casualty losses to personal-use property are subject to three limitations in computing a loss. The following reduces the dollar loss due to the casualty:

 

    1. Losses are reduced by reimbursement (insurance proceeds) you receive or expect to receive.
    2. Then each casualty loss must be reduced by $100. The first $100 of the casualty loss on personal-use property is not deductible.
    3. The loss is further reduced by a deduction equal to 10% of your adjusted gross income.

 

EXAMPLE: Assume a hurricane did $20,000 of damage to your residence. Insurance covered $15,000 of the loss. Your adjusted gross income for federal income taxes was $30,000. The deductible amount of your casualty would be $1,900. The loss is computer as follows:

 

Total Loss:

$20,000

Less:

 

Insurance - $15,000

 

First - $100

 

10% x $30,000 - 3,000

18,100

Casualty loss

$1,900

 

The casualty loss of $1,900 would be claimed on Federal Form #4684. To file an amended return use Federal Form 1040X.

 

Casualty losses for the state return are claimed as miscellaneous expense on page 2 of State Form D-400. To file an amended state return use Form D-400X.

 

NOTE: North Carolina law differs from federal law on the amount of a casualty loss since there is no $100 floor nor must the casualty be reduced by 10% of adjusted gross income.

 

3. Casualty losses on business or income producing property

Business and income producing property includes buildings used in business, machinery, rental housing and/or property, a stand of timber, and other equipment. Tax rules for determining a business casualty differ from rules applicable to personal-use property. These differences include the following:

 

    1. Losses are computer for each item of business property (for personal-use property an entire piece of real estate is considered one item). For business property casualty losses must be computed for each building, piece of equipment, etc.
    2. Business or income producing property is not subject to the $100 rule or the requirement that losses be reduced by 10% of adjusted gross income. Casualty losses in business are fully deductible.
    3. If you suffer a total loss of income-producing property, the casualty loss is the adjusted basis of the property minus any salvage value or insurance received. The adjusted basis is generally the property's original cost plus the cost of any improvements less the amount of depreciation allowed. When business or income-producing property is totally destroyed it does not matter what the decrease in fair market value is. The adjusted basis is used to determine loss.
    4. If business or income producing property is only partially destroyed in a casualty, your loss is the lesser of:

-The decrease in market value of the property, or

-The adjusted basis on the property.

Losses are then reduced by the salvage of the property and insurance proceeds received.

 

Business casualty losses are reported for Federal income taxes on Form 4684. Deductions for state income taxes are claimed as an adjustment to income on page 2, of Form D-400.

 

NOTE: Federal and state laws are the same for computing casualty losses for business property.

 

4. Insurance and other reimbursements

If you receive insurance or other types of reimbursement for your loss, you must subtract the reimbursement from the amount of the loss when you figure your deduction. If you expect to be reimbursed, but have not yet received payment, you still must subtract the "expected" reimbursement from the loss.

 

    1. Types of reimbursement

 

    1. Payments not considered as reimbursements

 

 

  1. Verifying casualty losses

To verify a casualty loss the following sources will be helpful:

    1. Photographs taken after the casualty will help in establishing the condition and value of the property after the casualty.
    2. Appraisals conducted by a competent appraiser.

 

For more information, contact Rick Hamilton, Extension Specialist, 919.515.5574.