Casualty Loss Deduction – Deducting your property losses

Did you know??  Casualty losses or theft losses not covered or reimbursed by your insurance company may be deductible on your federal income tax return. The deduction is taken for the year when the loss occurred, unless is from a federally declared disaster, in which case the deduction can be taken for the year preceding the tax year during which the loss occurred.

Which Property Losses are Deductible?

Deductible casualty losses include property losses resulting from sudden damage or destruction of your property due to an unexpected event such as fire, storms, floods, etc. Not qualifying as casualty losses for tax purposes are property losses resulting from accumulated or progressive deterioration, such as termite infestation, moisture infiltration, corrosion, etc.

Deductible theft losses are property losses resulting from removal of money or property from the owner, illegal under state law and done with criminal intent.

Casualty or theft losses that were not covered or reimbursed for by the insurer should be reported as an itemized deduction on Form 1040. If the deduction is more than your income, you will have a net operating loss for the year (business or individual).

How is the Casualty Loss Deduction Calculated?

The amount of the deduction depends on your adjusted gross income and other factors, and is computed using the formula.

From Decline in Market Value (DMV) due to casualty or theft:

– subtract insurance payout or other reimbursements

– subtract $100 for each time during the year that you had a property loss (for example, if you had unreimbursed property losses from 2 storms, this number would be $200)

– subtract 10% of your adjusted gross income

The basis of this computation is the DMV (decline in market value) figure. To correctly determine it and minimize the risk of an expensive audit or dispute, the IRS recommends using the services of a qualified and competent property loss appraiser, who understands the casualty loss deduction and follows the IRS guidelines for documenting and estimating the loss.

Hire a Qualified Appraiser

The IRS defines a qualified appraiser someone who has the proper training and experience, regularly performs such tasks for compensation and has a recognized designation from a professional organization. To determine competency, IRS considers the appraiser’s knowledge of the area, property, similar properties in the area, and the method of appraisal employed.

Some of the things the appraiser will document:

  • the loss was “sudden”, rather than resulting from gradual deterioration
  • the property’s adjusted value and decline in fair market value
  • his/her background information (education, qualifications, experience), the method used for appraisal and the purpose of the appraisal.

A well documented appraisal to support your property loss deductions will be respected by the IRS and the courts and not raise any red flags to begin with. Sometimes a CPA may be able to do roughly do the calculations for the loss amount. However, they are not qualified to appraise the Decline in market value or other documents, and will not meet the requirements for “competency” set forth by the IRS.

Michigan Fire Claims Inc.’s appraisers are extremely competent and highly qualified. Contact us today with any questions you may have about property loss appraisals or casualty loss appraisals for tax purposes.

Disclaimer: The purpose of this article is for general information only and does not represent personal tax advice either express or implied. You are encouraged to seek professional tax advice for personal income tax questions and assistance.