How a Loss of Property May Impact Your Taxes
With population growth the number of people impacted by natural disasters is on the rise. Unfortunately, population growth has also lead to an increase in personal property vandalism. The consequences for both can be costly. Depending on the degree and type of damage, losses may be tax deductible.
What Defines an Eligible Casualty Loss?
To be eligible for the deduction, the property damage must have been sudden, unexpected or due to uncommon causes. Acceptable grounds include:
- Government-ordered demolition
- Sonic boom
- Volcanic eruption
- Mine collapse
In every case, however, the property owner must have had neither the means nor the facility to sidestep the disaster.
What Types of Casualty Loss Are Not Deductible?
While properties that suffer unexpected damage may qualify for the deduction, those that have slowly deteriorated due to neglect will not. Nondeductible losses include those caused by:
- Accidental breakage
- A family pet
- Homeowner-instigated arson
- Lost or mislaid property
- Bad debt
- Lack of maintenance
Some types of damage fall into a gray area. For example, while a water heater that bursts due to rust does not qualify as a casualty loss, the harm it causes to either the residence or its contents normally does. Similarly, while injury to trees from a sudden and unexpected insect infestation would be deductible, their loss from curable disease that has gone untreated would not.
Knowing What You've Lost
When theft, fire, hurricane, tornado or similar calamity cause the untimely demise of a dwelling or its contents, the extent of loss can be difficult to prove. That's why the intelligent taxpayer will take pains ahead of time to catalog each of his major possessions. At times, the only proof of ownership could come down to the photographs taken in advance of the event. Purchase receipts for big-ticket items can also help.
Figuring the Value of an Article
Many people mistakenly believe that they can deduct the full current replacement cost of a missing or damaged item. This is incorrect. In fact, the allowable basis for calculation will be the lesser of either the item's depreciated value or its adjusted basis. The smaller of the two amounts figure will always be your starting point.
For example, if an item purchased for $10,000 has since doubled in value, you will base your calculations on its adjusted basis of $10,000. If, on the other hand, the item is now worth only $5,000, you must begin your computation using that depreciated number.
Calculating Your Loss
After determining the item's allowable value, you will need to calculate the proper deductible amount. For the simplest method of doing this:
- Add up the allowable value of each item lost in the event
- Subtract from the total any insurance settlements you may have received
- Decrease that total by an additional $100
- For the final result, subtract 10 percent of your adjusted gross income
These calculations will give you a general idea of the amount you can claim as a tax deduction on any particular casualty event. However, real-life situations can be more complicated, and IRS Publication 547 explains this is greater detail.
An event is not an official disaster until the President of the United States declares it to be so. However, once it has received this definitive designation, the taxpayer can look for additional relief. It's important to be aware, however, that tax deductions for large losses due to disaster or vandalism are more often subject to audit. Therefore, it is vital to keep detailed records such as pictures, receipts, insurance claim documentation and anything else that could serve to back up your claim.