 Figuring
tax deduction for casualty losses
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 Dear
Tax Talk,
We have had an interesting year in South Florida. We had some of
our glass doors and windows blown out by Hurricane Wilma. Our homeowners
insurance company has paid us for some of the other damages. (Ceiling
in the kitchen was gone; kitchen cabinets, verticals, wall treatment,
etc., will need to be replaced; and other major items repaired or
replaced). However, the homeowners insurance company has specifically
declined to pay for the blown-out doors and windows based on Florida
Statute 718.111, which became effective Jan. 1, 2004.
The association acknowledges responsibility, but to
what extent and how much the condo association's master insurance
policy will cover are still up in the air. My homeowners insurance
company is also paying a smaller amount, yet to be determined, for
interior damages. (Some antique-painted plates that were on display
were a total loss, for example.)
From an annual accounting period point of view, there
might be issues since we are being paid some of the reimbursement
this year, but with the major repairs for the big casualty losses
being made next calendar year. And reimbursement, if any, for repairs
made next year may be paid, if at all, next year or even later.
Boarding-up costs might be reimbursed by the condo association yet
this year. What can we do with the losses on our 2005 tax return?
-- Bart
 Dear
Bart,
When disaster strikes, your government is there for you -- eventually.
After Hurricane Katrina wiped out New Orleans, Congress passed a
series of measures designed to give some additional tax
breaks to those affected. Congress is currently debating the
extension of these relief provisions to those affected by hurricanes
Rita and Wilma. The IRS is even cooperating by granting relief --
most notably additional time until Feb.
28, 2006 to file most tax returns that were due at the time,
or subsequent to, when these storms hit.
Losses from a storm such as Wilma are termed casualty
losses and are deductible as an itemized deduction. These losses
can be claimed on your 2005 tax return, or if you want an earlier
refund, you can claim these losses by amending your 2004 tax return
if you have already filed (or by filing your 2004 return for those
who have not filed). You have until April 17, 2006 to decide if
you want to claim the loss in 2004 (April 15 is a Saturday in 2006.)
Each item in a casualty loss is reduced by $100 and
the total of all your casualty losses is reduced by 10 percent of
your AGI. For Katrina victims, Congress passed legislation that
removed the $100 and 10 percent reductions. Congress is currently
contemplating extending the same relief to victims of hurricanes
Rita and Wilma. The legislation is probably certain to pass, but
is currently tied up with other, more controversial, tax proposals.
IRS provides the following guidelines for computing your loss:
You determine your loss for personal use property by first figuring
the decrease in its fair market value as a result of the casualty
or theft. To do this, you must determine the fair market value
of your property both immediately before and immediately after
the casualty or theft (counting the value of stolen property as
zero). An appraisal is the best way to make this determination,
but under certain conditions you can use the cost of cleaning
up and repairing the property as a measure of the decrease in
value. Compare the decrease in fair market value with your adjusted
basis in the property. The adjusted basis is typically the cost
of the property and any improvements. From the smaller of these
two amounts, subtract any insurance or other reimbursement you
receive or expect to receive. Generally, you figure your loss
separately for each item, but treat real estate used for personal
purposes, such as your home, as one item (including the land,
buildings, trees and other improvements).
So, for example, if the antique plates were worth $1,000 but only
cost $500, your loss would be $500 reduced by any expected insurance
refund. Your boarding-up costs would be similarly deductible, less
any reimbursement.
Even though you may not be reimbursed until after
April 15th, you need to make an estimate of what will be reimbursed
or take an extension of time to file until you have a better idea
of the reimbursement. But you still have to file by the extended
due date. The loss is only deductible in 2004 or 2005, even though
you haven't been reimbursed. If later the reimbursement is more
or less than what you estimated, you can file an amended
return to correct the claim.
Since most losses will be reimbursed by insurance, it's safe to
claim your deductible as the amount of your loss less the expected
reimbursement plus any additional items that will not be reimbursed.
Most insurance companies will not cover landscaping and debris removal,
so consider that in addition to your losses.
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