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Disaster Assistance Self-Study - Reporting Casualty Gains and Losses

Casualty Losses - Definition

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

  • A sudden event is one that is swift, not gradual or progressive.
  • An unexpected event is one that is ordinarily unanticipated and unintended.
  • An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.

Casualty Losses - Disaster Loss

A disaster loss is a casualty loss that occurred in an area determined by the President of the United States to warrant federal disaster assistance. These places are known as "Federally Declared Disaster Areas".

Casualty Losses - Loss Proof

The following is information needed to support a casualty loss claim:

  • The type of casualty (car accident, fire, storm, etc.) and when it occurred.
  • That the loss was a direct result of the casualty.
  • That you were the owner of the property, or if a lessee, that you were contractually liable for the damage.
  • Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
  • Documentary evidence to support the claimed allowable loss.

Casualty Losses - To Prove a Loss

Records may have to be reconstructed. The information gathered will be used for tax purposes, as well as insurance reimbursement.

Knowledge Check

Which of the following is not information needed to support a claim of casualty loss?

A. The type of casualty.
B. The loss was a direct result of the casualty.
C. In what city the property was purchased.
D. That you were the owner of the property

Answer

Casualty Losses – Claiming Disaster Losses on a Return

  • Affected taxpayers in a Federal Disaster Area have the option of claiming disaster-related casualty losses on their federal income tax return either in the tax year the casualty occurred or the immediate preceding tax year.
  • Depending on when the disaster occurred, claiming the loss on an original or amended return for last year may get the taxpayer an earlier refund. But, waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Casualty Losses – Pub 547

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements, but they must first subtract $100 for each casualty event and then subtract ten percent of their adjusted gross income from their total casualty losses for the year.

Details on figuring a casualty loss deduction can be found in IRS Publication 547, Casualties, Disasters and Thefts.

Casualty Losses – Pub 584

Publication 584, Casualty, Disaster and Theft Loss Workbook is designed to help you figure loss on personal-use property. It contains schedules to help you compute loss on your main home, personal property and your vehicles. However, the schedules are for information purposes only. You must file Form 4684 to report your loss on Form 1040 (PDF).

Knowledge Check

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements, but they must first subtract…

A. $100
B. $200
C. $300
D. $400

Answer

Casualty Losses – Determination

To determine the amount of casualty loss to claim for damaged or destroyed property, you must:

First:

  • Determine the adjusted basis of the property before the disaster.
  • Determine the decrease in Fair Market Value (FMV) of the property as a result of the disaster.

Then, from the smaller of the adjusted basis or the FMV:

  • Subtract any insurance or other reimbursement received.

All individual losses are subject to:

  • 2% AGI limit if used for business by employee.
  • $100 deductible per event.
  • 10% AGI limit per annum.

Casualty Losses – Federally Declared Disaster Areas

In any federally-declared disaster area:

  • No gain is recognized on any insurance proceeds received for "unscheduled" personal property that was part of the contents of a main home.
  • Payments for the home and any scheduled property are treated as one payment. Any of this money used to replace any type of replacement property is not a recognized gain.
  • Disaster relief payments or assistance do not reduce the casualty loss unless they replace lost or destroyed property.
  • Disaster unemployment payments are unemployment income and are taxable.
  • Post-disaster grants are generally not included in income. However, do not include as casualty losses any amounts covered by the grant payments.
  • Taxpayers have the option to claim disaster-related casualty losses for either the year of occurrence or the prior year.
  • Taxpayers should put the assigned Disaster Designation in red ink at the top of their tax forms.
  • Taxpayers should include in income:
    • Temporary living payments from insurance that are in excess of the actual increase in temporary expenses.
    • The excess goes on line 21 of Form 1040 (PDF).

Casualty Losses - FEMA Mitigation Programs

Taxpayers should include in income payments received from:

  • Flood Mitigation Assistance Program (FMA)
  • Pre-Disaster Mitigation Program (PDM)
  • Hazard Mitigation Grant Program (HMGP)

** There is no reduction to valid Casualty Loss claims **

- Watch For Potential Law Changes – 

Knowledge Check

To determine a casualty loss you must first determine the...

A.  Depreciated value of the asset lost or damaged
B.  Fair market value of the asset lost or damaged.
C.  Value when new of the asset lost or damaged.
D.  Replacement value of the asset lost or damaged.

Answer

Gains on Casualty Losses

If you receive an insurance payment or other reimbursement in excess of the adjusted basis of damaged or destroyed property you will have a gain:

  • The gain is the amount received minus the adjusted basis in the property.

If your main home is destroyed and the insurance proceeds result in a gain:

  • You can treat this as a sale of residence subject to the same rules.
  • If the home was not used or owned for 2 of the last five years a reduced maximum gain exclusion will apply.
  • If located in a Federally Declared Disaster Area, you can postpone any "recognized" gain on your main home if you buy a new home within 4 years of the end of the year the disaster occurred, or
  • You can recognize the gain and report it.
  • You do not have to recognize gain on destroyed/damaged business property if it is replaced within two years of the end of the tax year in which the gain is realized.
  • If received payment in 2004 resulting in a gain, you must replace the property prior to 1/1/2007 to defer the gain. 

You cannot postpone the gain if you buy replacement property from a related party. This applies to:

  • C Corps
  • Partnerships in which more than 50% of the capital or profits is owned by a C Corp
  • All others if the total realized gain for the year is over $100,000.

To defer the gain:

  • You must buy property specifically to replace the damaged or destroyed property in order to defer the gain.

The basis of the replacement property will be:

  • The adjusted basis of the property being replaced.

Knowledge Check

If located in a Federally Declared Disaster Area, you can postpone any “recognized” gain on your main home if you buy a new home within  ????  of the end of the year the disaster occurred.

A.  One year
B.  Two years
C.  Three years
D.  Four years

Answer

Reporting Casualty Gains/Losses

Report loss on return for year it occurred. If the event took place in a federally declared disaster, you can amend the prior year return.

The election to amend must be made by:

  • Due date (without extensions) for filling your income tax return for the tax year in which the disaster actually occurred.
  • Due date (with extensions) for filing the return for the preceding tax year.

Once the election is made, it can be revoked within 90 days of making the election. The taxpayer must:

  • Return any refund or credit received from making the choice.
  • If revoked prior to getting a refund, must return refund within 30 days of receiving it for the revocation to be effective. 

Individual Returns:

  • Losses go on Form 4684 (PDF) and carry to Schedule A.
  • Gains go on Form 4684 and carry to Schedule D.
  • Includes losses on income-producing property and property used in performing services as an employee (held less than one year).
  • Have the option to claim disaster-related casualty losses for either the year of occurrence or the prior year.

Business and income producing property:

  • Losses are reported on Form 4684 and carry to various forms.
  • Business use of home carries to Form 8829(PDF).
  • Other business property carries to Form 4797(PDF).

Rental Properties:

  • Report on Form 4684 and then on Form 4797.
  • Have 2 years from the close of tax year when you realize the gain to replace the property and defer the gain.
  • Losses are not limited by Form 8582(PDF).

Insurance Reimbursement after filing:

  • If less than expected (and accounted for on casualty loss) include the difference as a loss on the return for the year when you can reasonably say you’re not getting any more money.
  • If greater than expected (and accounted for on casualty loss) include the difference as income in the year received.

Reporting Casualty Gains/Losses –Net Operating Losses

  • Individual or Business casualty losses can generate Net Operating Losses (NOL).
  • NOLs generated by casualty losses can be carried back or forward the same as any other NOL.

Reporting Casualty Gains/Losses -What’s Not Included

Losses do not include:

  • A reduction in profits or
  • Loss of income.

Knowledge Check 

You will have a gain if you receive reimbursement in excess of the...

A.  Adjusted basis of the damaged or destroyed property
B.  Fair market value of the damaged or destroyed property
C.  The initial cost of the damaged or destroyed property
D.  The current value of the damaged or destroyed property

Answer

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Page Last Reviewed or Updated: 14-Aug-2014