Reeling from hurricane casualty losses Tax Talk by George Saenz • Bankrate.com

Dear Tax Talk,
I live on the water in a county that got hit by Wilma. I went through the three hurricanes in 2004 (also affected county) with no damage. However Wilma took out 40 to 50 feet of seawall and 5 feet of land in a 12-hour period due to direct wind and wave action from the west. It will cost $50,000 to replace and refill. Is this eligible for the casualty loss deduction?
-- Joe

Dear Joe,
What you describe is the typical casualty loss deduction. To determine your deduction for a casualty loss, you must first figure out your loss. Calculate the amount of your loss using the following steps:

The decrease in FMV used to figure the amount of a casualty loss is the difference between the property's fair market value immediately before and immediately after the casualty. To figure the decrease in FMV because of a casualty, you generally need a competent appraisal. However, other measures also can be used to establish certain decreases.

You can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions.

• The repairs are actually made.
• The repairs are necessary to bring the property back to its condition before the casualty.
• The amount spent for repairs is not excessive.
• The repairs take care of the damage only.
• The value of the property after the repairs is not, due to the repairs, higher than the value of the property before the casualty.

Most people forget to include the value of lost landscaping in figuring their loss. This is generally not reimbursed by insurance. Your deduction can include what you spend on the following.

• Removing destroyed or damaged trees and shrubs, minus any salvage you receive.
• Pruning and other measures taken to preserve damaged trees and shrubs.
• Replanting necessary to restore the property to its approximate value before the casualty.

So in addition to the $50,000 restoration costs, you might be able to add replanting costs. Additionally, if the area suffered an overall decrease in value that is not expected to be temporary, your loss in FMV may be greater than the restoration costs. If this is the case, you may want an appraisal to establish the loss deduction.

Casualty losses are reported on Form 4684 and are an itemized deduction. If you're in a federally declared disaster area, you can claim the loss on your 2004 tax return or otherwise on your 2005 tax return. You would not claim the loss in the year that you make the repairs. I have recently responded to another reader with a Wilma-related loss that might shed more light on this topic. In addition, check out IRS Publication 547.