Deducting a Casualty Loss
It seems like almost every day the news is filled with stories of people losing their property and even their entire homes to hurricanes, tornadoes, fires, and winter storms. If you have suffered a property loss, you may be able to cla.im a "casualty loss" tax deduction.
What Qualifies as a Casualty?
A "casualty" is the destruction of property from some sudden, unexpected, or unusual event. Examples include' fires, storms, and car accidents. Progressive deterioration - for example, from termite infestation or a slmv furnace leak - does not qualify. Neither does a mere decline in value. The deduction is available only for physical damage or loss to your own property. For example, if you are in a car accident and pay for damage done to t.he other driver's car, the cost. clops not qualify. Likewise, if you're injured in the accident, your unreimbursed medical expenses do not qualify as a casualty loss (though they may count toward a medical expense deduction).
If your destroyed property was held for personal (nonbusiness) use, your casualty loss will be the lesser of (l) the decline in the propert.y's value or (2) your basis in the property (usually, its cost). This calculated loss must be further reduced by any salvage value or insurance proceeds received. Generally, two additional tax rules apl)ly before you can take the deduction. First , the loss must he reduced by a $100 "floor." Second, the deduction is allowable only to the extent. it. (combined with any other casualty losses) exceeds 10% of your adjust.ed gross income (AGI).
Example. Kyrie's AGI is $90,000. A storm blows a tree down causing $30,000 of damage to her house, which she purchased for $250,000. The insurance company gave her $20,000 for the loss. To begin calculating her deduct.ion, Kyrie takes the lesser of her basis ($250,000) and the cost of the damage ($30,000). After making a reduction for the insurance payment and the $100 "floor," Kyrie has a potential $9,900 deduction. However, the deduction is limited to the amount that exceeds 10% of her AGJ ($9,000), so her casualty loss deduction will be $900. To take a casualty loss deduction for personal property, you must itemize your deductions OIl Schedule A and complcte Form 4684, GrLSualties and Thefts.
Similarly, for trade or business property, I.he amounl. of the casualty loss is equal to the lesser of (1) the property's adjusted basis or (2) its decline in value. However, if the property is totally destroyed, the amount of the loss is equal to the property's adjusted basis. This rule prevents a business from t.aking a casually loss deduction for more than the depreciated value of the property. The two additional Iimitat.iolls t.hat apply to casualty losses for personal property - requiring that the deductible loss exceed both a $ 100 "floor" and 10% of AGI - do not apply in the case of casualty losses to business property. If property is held partly for personal and partly for business use, it must be t reated as t.wo spparatp propelties, and the loss must he aIIocat.ed appropriately.
Federally Declared Disasters
If the property was damaged as the result of a federally declared d.isaster, you may elect to deduct the loss in the tax year before the loss was incurren. Making the election may enable you to secure a tax ref wId earlier .
1 Employers: File Form 941, Employer's Quarterly Federal Tax Return; quarterly deposit due for those who meet the safe harbor requirements.
10 Employers: Deferred due date for Form 941, if timely deposits were made. 15 Exempt organizations: File 2016 Form 990, 99O-EZ, or 990-N, if the organization reports on a calendarbasis.
15 Partnerships and S Corporations: If an election to use a tax year other than a required tax year was made, file Form 8752 to report the required payment.
15 Individuals: Second installment of 2017 estimated tax due.
15 Corporations: Deposit second installment of estimated income tax for 2017, if the organization reports on a calendar-year basis.
31 Employee Benefit Plan Sponsors: File 2016 Form 5500 Annual Retum/Report of Employee Benefit Plan. If your plan is not a calendar-year plan, file the form by tile end of tile seventll montll after the plan year ends.
31 Employers: File Form 941, Employer's Quarterly federal Tax Return; quarterly deposit due.