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Individual Tax Options Available for Casualty Losses on Underinsured or Uninsured Personal Use Property

Posted at Feb 29, 2016

By Michael C. Perlmuter, JD, President & General Counsel

and Donald J. Dragony, CPA, CFF, Senior Vice President, Chief Financial Officer & Director of Forensic Accounting

Learn about tax options that are available to corporations that have experienced a loss

Catastrophic losses to one’s home or personal use property are tragic in nearly every sense. Fires, hurricanes, tornadoes and the like can wipe out your place of living, injure your loved ones and cause financial disaster. It is especially tragic from a financial viewpoint, when a homeowner is either under-insured or uninsured.

For more than 85 years, the Alex N. Sill Company as a public insurance claims adjuster has represented insured homeowners and policyholders in connection with adjusting property claims from insured perils such as a fire, hurricane, tornado and other calamities. Fortunately, in most cases, our insured clients have sufficient insurance to cover the damages. However, there are instances where a homeowner or a property owner is either not insured or is underinsured vis a vis the damages sustained.

Oftentimes, those homeowners ask us whether there is any relief for someone who is either uninsured or underinsured (other than what they may recover from their insurance claim)?

The answer is yes…but only with the proper sufficient documentation. Read on…

According to the Taxation Section of the American Bar Association, if a property owner suffers a loss that is caused by a sudden, unexpected or unusual event that is not fully reimbursed through insurance, the policyholder may claim a deduction for the year in which the loss occurred.

Furthermore, in those circumstances where the loss was the result of a loss eligible for Federal Disaster Relief, the homeowner or individual policyholder CAN choose to deduct the loss either in the year of the loss OR in the prior year by filing amended federal and state returns. By taking the deduction in the prior year, the taxpayer may receive an immediate tax refund or a reduced tax liability. In order to determine whether or not you are in a disaster relief area, you will want to refer to www.fema.gov.

Please keep in mind that in neither case can a loss be claimed for normal wear and tear or progressive deterioration — only that which was caused by a sudden, unexpected or unusual event.

Most important to the process of claiming a tax deduction for an unpaid or underpaid insurance claim is the integrity and sufficiency of the backup detail to the loss. The Internal Revenue Service is likely to disallow a claimed loss amount if the detail is not the type of damage estimate provided by a skilled, experienced public insurance adjuster that details, on a line by line basis, the actual damages incurred. A public adjuster, such as Sill, with experience and expertise to detail such damage, will need to be hired to substantiate the attempted tax loss.

Step One: Calculating the tax loss

Further, according to the Taxation Section of the American Bar Association, the easiest way to calculate a property/ casualty disaster loss is to take the lesser of the adjusted basis of the property, or its 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 you own a property with an adjusted basis of $400,000 and a decrease in fair market value of $500,000 that is completely destroyed and $300,000 is received in insurance proceeds (as that was the policy limit), the disaster loss would be $100,000. That is calculated by taking the adjusted basis ($400k), which is less than the decrease in fair market value ($500k), and subtracting the insurance payments $300k). (IRS Publication 547 explains how to calculate personal disaster losses.)

When a property owner calculates the disaster loss, he or she must take into account the amount of insurance payments that are expected to be received whether or not a claim is filed. If later, less insurance money than was expected was received, he or she may include that difference as a loss for the year in which no further insurance or reimbursement is expected.

If a choice is made not to file an insurance claim, the disaster loss cannot exceed the amount of the deductible.

Step Two: Calculating the applicable loss deduction

After a homeowner or individual property owner calculates the disaster loss on his personal use property, there are two additional calculations that go into determining how much is actually deductible.

  1. The property owner must subtract a $100 standard deduction from the reportable disaster loss. Per the above example, the calculation would $100,000 less $100 or $99,900.
  2. The property owner must subtract 10% of his/her or joint adjusted gross income.

For example, if the disaster loss is $100,000 and the adjusted gross income (AGI) is $200,000, an amount equal to $79,900 of the loss may be deducted.

Non-covered disaster loss$100,000IRS standard reduction100Non-covered net$ 99,900Taxpayer AGI$ 200,000Taxpayer 10% of AGI20,000Disaster loss deduction$ 79,900

These calculations are made on IRS Form 4684, which must be attached to the property owner’s federal income tax return.

[Note: the information provided above does not constitute tax advice and cannot be relied upon by a taxpayer which desires to submit a casualty loss. In the event that a taxpayer wishes to seek a casualty loss deduction with the IRS, we recommend that you seek formal tax advice before attempting to take any such tax deduction.]



Written by Sillco