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Safe harbor methods for individual taxpayers to determine the amount of their casualty and theft losses (updated) -- 02-FEB-2018

Revenue Procedure 2018-08 provides safe harbor methods that you may use to figure the amount of your casualty and theft losses to your personal-use residential real property and personal belongings, including some methods applicable only to losses from a federally declared disaster. To figure the amount of your casualty and theft losses, you generally must determine the actual reduction in the fair market value (“FMV”) of the lost or damaged property using a competent appraisal or the cost of repairs you actually make. But the safe harbor methods in Rev. Proc. 2018-08 allow you to determine the decrease in FMV in other ways. If you qualify for and use a safe harbor method described in Rev. Proc. 2018-08, the IRS will not challenge your determination. The use of a safe harbor method described in Rev. Proc. 2018-08 is not mandatory.

Personal-Use Residential Real Property Safe Harbor Methods. Personal-use residential real property generally is real property, including improvements, that is owned by an individual who suffered a casualty loss and that contains at least one personal residence. It does not include a residence that contains a home office or certain other types of residential real property. For more details, see Rev. Proc. 2018-08.

The following safe harbor methods for personal-use residential real property are available through Rev. Proc. 2018-08:

  • Estimated Repair Cost Method
  • De Minimis Method
  • Insurance Method
  • Federally Declared Disaster Method—contractor safe harbor
  • Federally Declared Disaster Method—disaster loan appraisal

The estimated repair cost safe harbor method allows you to figure the decrease in the FMV of your personal-use residential real property using the lesser of two repair estimates prepared by separate and independent licensed contractors. The estimates must detail the itemized costs to restore your property to its condition immediately before the casualty. The estimated repair cost safe harbor method is limited to casualty losses of $20,000 or less before the application of the limits under IRC § 165(h).

The de minimis safe harbor method allows you to figure the decrease in the FMV of your personal-use residential real property based on a written good faith estimate of the cost of repairs required to restore your property to its condition immediately before the casualty. The de minimis safe harbor method is available for casualty losses of $5,000 or less before the application of the limits under IRC § 165(h).

The insurance safe harbor method allows you to figure the decrease in the FMV of your personal-use residential real property based upon the estimated loss in reports prepared by your homeowners’ or flood insurance company. These reports must set forth the estimated loss you sustained from the damage to or the destruction of your property.

If the loss occurred in a disaster area and was due to a federally declared disaster then you may use the contractor safe harbor method or the disaster loan appraisal method. Under the contractor safe harbor method, you may use the contract price for the repairs specified in a contract prepared by an independent and licensed contractor to determine the decrease in the FMV of your personal-use residential real property. This safe harbor method does not apply unless you are subject to a binding contract signed by you and the contractor setting forth the itemized costs to restore your personal-use residential real property to its condition immediately before the casualty. Under the disaster loan appraisal safe harbor method, you may use an appraisal prepared to obtain a loan of federal funds or a loan guarantee from the federal government that identifies your estimated loss from a federally declared disaster to determine the decrease in the FMV of your personal-use residential real property.

Personal Belongings Safe Harbor Methods. Personal belongings generally include items of tangible personal property owned by an individual who suffered a casualty or theft loss if they are not used in a trade or business. Personal belongings do not include any item that maintains or increases its value over time or certain other types of property. For more details, see Rev. Proc. 2018-08.

The safe harbor methods for personal belongings are the de minimis method and the replacement cost safe harbor method for federally declared disasters. Under the de minimis method, you can make a good faith estimate of the decrease in the FMV of your personal belongings. You must maintain records describing your affected personal belongings as well as your methodology for estimating your loss. This method is limited to losses of $5,000 or less before the application of the limits under IRC § 165(h).

The replacement cost safe harbor method for federally declared disasters allows you to determine the FMV of your personal belongings located in a disaster area immediately before a federally declared disaster to figure the amount of your casualty or theft loss. To use the replacement cost safe harbor method, you must first determine the current cost to replace your personal belonging with a new one and then reduce that amount by 10% for each year you have owned the personal belonging. See “Personal Belongings Valuation Table” in Rev. Proc. 2018-08 in the Replacement Cost Safe Harbor Method. If you choose to use the replacement cost safe harbor method, then you must apply that method to all your personal belongings for which you are claiming losses under IRC § 165 with certain exceptions identified in Rev. Proc. 2018-08.

Reporting Requirements on Form 4684 Attach a statement to Form 4684 stating that you used Rev. Proc. 2018-08 to determine the amount of your casualty loss. Include the specific safe harbor method used. When completing Form 4684, do not enter an amount on line 5 or line 6 for each property. Instead, enter the decrease in the FMV determined under the relevant safe harbor method on line 7.

Each of these safe harbor methods is subject to additional rules and exceptions. For additional information, see Rev. Proc. 2018-08.