Taking a Disaster Loss Tax Deduction

October 6, 2011

In a recent blog article, Christina Hausner explained how Lancaster County residents affected by the recent flooding may be eligible for property tax relief. In addition to those tax advantages, taxpayers may be able to deduct uninsured losses resulting from catastrophic damage. 

The Internal Revenue Service allows deductions for "casualty losses," which are defined as the complete or partial destruction of a taxpayer’s property resulting from an identifiable event that is sudden, unexpected and unusual. Disaster losses are casualty losses that occur within an area that has been declared a disaster area by the federal government. 

There are two methods of determining the dollar amount of a disaster loss. The first method is to have a qualified appraiser determine the fair market value of the property immediately before and immediately after the disaster, the difference of which would be the loss. The second method takes into account the actual cost of repairing the property in determining the loss, which can only be done when the property is actually repaired. In addition, no part of a loss for which the taxpayer has been reimbursed or for which there is a reasonable prospect of reimbursement is deductible. Another limitation is that disaster losses are generally subject to a floor equal to 10% of the taxpayer’s adjusted gross income (AGI). This means that the loss can only be taken to the extent that it exceeds 10% of the taxpayer’s AGI.

Normally, casualty losses must be taken in the year that the casualty occurs. However, different rules apply to disaster losses. Since Lancaster County has been declared a disaster area, taxpayers can elect to deduct their disaster losses either in the year the disaster occurred or the immediately preceding year. One advantage of this special rule is that the taxpayer can receive the economic benefit of the deduction sooner by receiving an immediate refund on the preceding year’s return rather than waiting for the close of the current tax year. The election to take a disaster loss in the preceding year is made by filing a return, an amended return or a refund claim that clearly shows that the election is being made. 

The second tax advantage relates to the 10% AGI floor limitation. Using the special rules for disaster losses, the taxpayer can choose to take the deduction in the year in which his or her AGI is lower, making more of the loss available.

Please be aware that there are other rules, exceptions and technicalities that may be applicable in your particular case. As a result, I strongly recommend consulting with a tax professional if you are considering taking a disaster loss deduction.

Matthew Grosh is a lawyer at Russell, Krafft & Gruber, LLP in Lancaster, Pennsylvania. He received his law degree from Villanova University and practices in a wide variety of areas including Taxation.

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