How do I calculate my disaster loss?
Take the lesser of the adjusted basis of the property, or the decrease in fair market value due to the disaster, and subtract any insurance or other reimbursement you received or expect to receive. For example, if a home with an adjusted basis of $80,000 and a value of $120,000 was completely destroyed and the owner received $70,000 in insurance payments, the owner's disaster loss would be $10,000. This is determined by taking the adjusted basis ($80,000), which is less than the decrease in fair market value ($120,000), and subtracting the insurance payments ($70,000). We can help you with this calculation if needed, especially since most people are unsure just how much they will receive from insurance or a lawsuit.
If I have not yet filed an insurance claim, can I count the whole loss to figure out my tax deduction or do I have to count the insurance payments that I expect to receive?
When you calculate your disaster loss, you must take into account the amount of insurance payments or settlement from a lawsuit that you expect to receive, whether or not you have filed a claim. If you later receive less insurance money than was expected, you may include that difference as a loss for the year in which you expect no further insurance or other reimbursement. If you choose not to file an insurance claim, your disaster loss can not exceed the amount of your insurance deductible.
How do I decide whether it is better to take the disaster loss in the year of the disaster or in the prior year?
This is an important question. Your tax attorney should calculate the tax benefit both ways and see which is greater. Also consider the time value of money and other factors on both year’s tax returns. Since the disaster loss is deductible only to the extent it exceeds 10% of your adjusted gross income, it may be smarter to claim the loss in the year in which your income is lower. You will need to itemize deductions (instead of claiming the standard deduction) in order to claim the disaster loss deduction.
How long do I have to decide whether to claim the disaster loss on an amended return for the prior year?
You must make this election to take your casualty loss for the disaster in the preceding year on or before the date that is six months after the regular due date for filing your original return (without extensions) for the tax year in which the disaster actually occurred.
How do I determine the reduction in my property's fair market value?
The best way to determine the reduction in your property's fair market value is to have a professional appraisal. If you had an appraisal done to secure a federal loan through the federal disaster program, you can use that appraisal. Choosing the appraiser is very important because the appraisal may be challenged by the IRS and defense attorney in a lawsuit. Your attorney may be able to refer you to a qualified appraiser.
Does the cost of the appraisal get added to my loss?
No. The cost of the appraisal is considered a “miscellaneous itemized deduction” and may be deducted, with other miscellaneous itemized deductions, only to the extent that they exceed 2% of adjusted gross income. However, it would be added to your list of damages in a lawsuit.
I don't own a home but my rental residence and its contents were destroyed. Can I claim a disaster loss for personal property even if I did not own a home?
Yes. The disaster loss rules for renters are the same as for homeowners. Once you determine the lesser of the adjusted basis and the decrease in fair market value of the property, you then subtract the amount of insurance proceeds to determine the amount of the disaster loss. If you do not have any insurance, just skip that step when you calculate your loss.