We sure hope you and your family weathered Hurricane Sally with minimal damage to your property and that you remain safe from any physical harm during this recovery phase. With the extent of damage sustained in our area, many of you may have questions about losses incurred on your property due to the storm.
Personal casualty losses of individuals are potentially deductible if attributable to a federally declared disaster. FEMA has announced that due to Hurricane Sally, a major disaster exists in Baldwin, Escambia, and Mobile counties in Alabama. Counties in Florida have not yet been declared.
For tax purposes, the amount of a personal casualty loss is the decrease in fair market value of the property, limited to your adjusted basis in the property (generally your cost to acquire and improve the property). If the loss is covered by insurance, it is only deductible if a timely insurance claim has been filed. Any insurance proceeds or other reimbursements received will reduce the casualty loss. Appraisals can best document the loss in value, but other methods such as repair estimates may also be able to be used to support the loss.
After determining the amount of your loss, several limitations must be considered to determine if your loss will be deductible. First, personal casualty losses are an itemized deduction, so taxpayers who get a greater benefit from the standard deduction will not have a deductible casualty loss. For those that itemize, the loss must first be reduced by $100. Then you can deduct the balance of the loss only to the extent it exceeds 10% of your adjusted gross income (AGI). These limitations do not apply to losses of business-use or income-producing property.
For example, let’s say your AGI is $100,000 and you have $30,000 in unreimbursed losses from Hurricane Sally damage to your home. You would first subtract $100 from the loss. Then you would subtract $10,000 (10% of your AGI). The resulting $19,900 is the amount you could claim as an itemized deduction.
Casualty losses resulting from a federally declared disaster are eligible to be claimed on either the taxpayer’s 2020 or 2019 tax return.
These are some general rules that may help you determine if you potentially have a deductible casualty loss. If you have specific questions relative to your personal situation, please don’t hesitate to contact us.
We wish you continued health and safety during this challenging time,
The Partners of
Russell Thompson Butler & Houston, LLP
*At the time of this email – the counties in Florida affected by Hurricane Sally have not yet officially been declared disaster areas by FEMA. We expect that they could be declared in the coming days and will update you accordingly.