Topic 515 - Casualty, Disaster, and Theft LossesCasualty losses can result from the destruction of, or damage to your property
from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado,
fire, earthquake or even volcanic eruption.
If your property is not completely destroyed or stolen, determine your loss from
a casualty by first figuring the decrease in fair market value of your property as
a result of the casualty event. To do this, you must determine the fair market value
of your property both immediately before and immediately after the casualty. An appraisal
is the best way to make this determination. Compare the decrease in fair market value
with your adjusted basis in the property. The adjusted basis is usually the cost of
the property plus or minus certain adjustments. From the smaller of these two amounts,
subtract any insurance or other reimbursement you receive or expect to receive. The
result is your loss from the casualty. For more information about the basis of property,
refer to Topic 703, or refer to Publication 551, Basis of Assets.
Up to this point, figuring the deductible loss is the same for business, income-producing,
and personal-use property. If the property was held by you for personal use, you must
further reduce your loss by $100. This $100 reduction for losses of personal–use
property applies to each casualty or theft event that occurred during the year. The
total of all your casualty and theft losses of personal–use property must be
further reduced by 10% of your adjusted gross income.
In figuring your loss, do not consider the loss of future profits or income due
to the casualty.
For more information regarding casualty losses of personal–use property and
how to deduct them, refer to Topic 507 and Publication 547, Casualties,
Disasters, and Thefts.
Casualty losses are generally deductible only in the year the casualty occurred.
However, if you have a deductible loss from a disaster in a Presidentially declared
disaster area, you can choose to deduct that loss on your tax return for the year
immediately preceding the loss year. If you have already filed your return for the
preceding year, the loss may be claimed in the preceding year by filing an amended
return, Form 1040X (PDF).
Generally, you must make the choice to use the preceding year by the due date of
the current year's return, without extensions. For example, the election to deduct
a 2003 disaster loss on your 2002 return must be made on or before the due date (without
extensions) of the 2003 return. This is April 15, 2004, for calendar year individuals
and March 15, 2004, for calendar year corporations. You can revoke this choice within
90 days after making it by returning to the IRS any refund or credit you received
from making the choice. However, if you revoke your choice before receiving a refund,
you must return the refund within 30 days after receiving it for the revocation to
be effective.
If your main home, or any of its contents, is damaged or destroyed as a result
of a disaster in a Presidentially declared disaster area, do not report any gain due
to insurance proceeds you receive for unscheduled personal property, such as damaged
furniture, that was part of the contents of your home. Any other insurance proceeds
received for the home or its contents can be treated as being received for a single
item of property. Any replacement property you purchase that is similar or related
in service or use to your home or its contents is treated as similar or related in
service or use to that single item of property. You can choose to recognize gain only
to the extent that these funds are more than the cost of your replacement property.
If you choose to postpone any gain from the insurance proceeds you received, the period
for purchasing replacement property is four years after the close of the first tax
year in which any gain is realized.
Renters qualify to choose relief under these rules if the rented residence is their
main home.
If your home is located in a Presidentially declared disaster area and your state
or local government orders you to tear it down or move it because it is no longer
safe to live in, the resulting loss in value is treated as a casualty loss from a
disaster. Figure your loss in the same way as any other casualty loss of personal–use
property. This order must be issued within 120 days after the area is declared a disaster
area.
If your loss deduction is more than your income, you may have a net operating loss.
You do not have to be in business to have a net operating loss from a casualty. For
more information, refer to Publication 536, Net Operating Losses.
Casualty losses are claimed on Form 4684 (PDF), Casualties
and Thefts. Section A is used for personal–use property and Section B is
used for business or income-producing property. If personal-use property was destroyed
or stolen, you may wish to refer to Publication 584, Casualty, Disaster, and
Theft Loss Workbook, to help you catalog your property. If the property was business
or income-producing property, refer to Publication 584B (PDF), Business
Casualty, Disaster, and Theft Loss Workbook.
The IRS may postpone for up to one year certain tax deadlines of taxpayers who
are affected by a Presidentially declared disaster. The tax deadlines the IRS may
postpone include those for filing income, estate, gift, generation-skipping transfer,
certain excise, and employment tax returns, paying taxes associated with those returns,
and making contributions to a traditional IRA or Roth IRA.
If the IRS postpones the due date for filing your return and for paying your tax
and you are affected by a Presidentially declared disaster area, the IRS may abate
the interest on underpaid tax that would otherwise accrue for the period of the postponement.