Net income provides a more accurate account of the financial status. Here’s why.
What is disaster loss?
Disaster loss occurs when resident incur a loss in an area that the president has declared as a national disaster area. Phenomena including floods, earthquakes and forest fires can cause disaster losses. These losses are considered tax-deductible losses.
Under disaster loss, there are two options in which the owner of the damaged property can claim a disaster loss — the taxable year when the property damage occurred or the year before the disaster occurred.
By claiming a disaster loss a year before the damage, a homeowner will benefit from a refund issued quickly since the loss will reduce the tax liability of that year. However, the homeowner must attach a statement that is clearly written to the loss documentation showing:
- Where the disaster occurred, including the county, state and city.
- When the disaster occurred, including the actual date.
- The option of either deducting the loss in the taxable year that the disaster occurred or the taxable year immediately before the disaster year.
It is important that the homeowner takes and keeps the photos of the property damaged by the disaster for proper documentation and evidence. Even though the sustained damage does not comply with the disaster occurrence test, homeowners still can claim a loss if they must move out of an affected area.
Disaster loss example
Suppose a homeowner suffers loss of property in a storm in July 2017 when the president declared a locale to be a disaster area, the homeowner can claim this as disaster loss on his or her 2017 tax return by filing for it by March 2018.