Can I Claim a Casualty Loss for Tax Purposes?

Q.  My home suffered major damage after a horrible storm. Do I get a tax break for a disaster like this?

A.   Possibly. When a natural disaster, such as a tornado or hurricane strikes your home or business, the results can be devastating — especially if the losses aren't fully covered by insurance or your insurance claim is contested.


What Qualifies for Tax Purposes?
 
To get a casualty tax write-off, damage must be caused by a "sudden, unexpected or unusual" event such as a hurricane, earthquake, tornado, fire, flood or storm. Auto collisions and thefts can also qualify. (There is no deduction for damage that results from gradual deterioration, such as destruction caused by termites or drought.)

Fortunately, you may be able to get help from Uncle Sam by claiming a casualty loss deduction on your tax return. If your region is officially designated as a "presidentially-declared disaster area" you don't even have to wait until you file your next tax return. You may be able to file an amended return for last year and get a quick tax refund for fast financial relief.

Claiming the loss on a return for last year will get you an earlier refund, but waiting to claim the loss on this year's return could result in a greater tax saving, depending on other income factors.

If you suffer a casualty or theft loss, you generally may deduct the amount of your unreimbursed loss only to the extent that your losses for the year exceed 10 percent of your adjusted gross income (AGI) for the year. (Special rules apply to losses in federal disaster areas.) Before the 10 percent limit is applied, you must subtract $100 for each casualty or theft occurrence.

Example: Let's say the storm damage to your home is estimated at $200,000. But the insurance only covers $150,000. Your AGI is $100,000. After subtracting $100, your deductible loss is limited to $39,900 ($50,000 unreimbursed amount minus $100 minus 10 percent of your $100,000 AGI).

However, there are no limits on losses for business or income-producing property such as rental real estate. In other words, you can write off business losses without applying the 10 percent limit or the $100 per casualty amount applied to personal losses. So if your business suffered $50,000 of damage that was not reimbursed by insurance, the entire amount would be deductible (assuming your tax basis in the damaged assets was at least $50,000).

To claim a property loss, for tax and insurance purposes, you must be able to prove that a disaster took place. Keep copies of newspaper clippings and police reports. Take photos or videos after a casualty. If you have any "before" and "after" pictures or videotapes, they can help back up casualty loss claims of the disaster. This kind of detailed documentation may also be necessary to get insurance reimbursement and to apply for FEMA grants and SBA loans.

In addition to compiling records and other proof, you may also have to substantiate the value of the property loss by getting an independent appraisal from a real estate expert. (The cost of the appraisal and the cost of obtaining photographs or videos may be deductible as a miscellaneous expense.)

Consult with your tax adviser for more information about claiming deductions after suffering a casualty.