Casualty Gains and Losses

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Casualty Gains and Losses
David Donnelly Gainer, Donnelly Desroches, LLP
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Definition of a Casualty

• The Code defines Casualty Losses as losses
  which arise from fire, storm, shipwreck, or
  other casualty, or from theft
• Clearly, losses from Hurricane Ike fit within the
  definition
• In general, the case law indicates that the loss
  must be sudden
• Termite damage, for instance, is not a casualty

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Calculation of the Loss

• The loss is the lesser of
• The difference between Fair Market Value
  immediately before and immediately after the
  casualty or
• Adjusted basis of the property
• If the loss is total, and adjusted basis is
  higher than Fair Market Value before the loss,
  the loss is the adjusted basis
• Adjusted basis is generally cost less accumulated
  depreciation
• The Loss is reduced by the insurance and/or other
  compensation received
• Casualty Gains are possible

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Fair Market Value

• Appraisals are necessary if the property is not
  repaired
• Cost of appraisal is a miscellaneous itemized
  deduction subject to the 2 floor
• Cost to repair partially destroyed property to
  its original condition is evidence of decline in
  value
• Loss is limited to the costs to repair to
  original condition any repairs which increase
  the value of the property over its pre-casualty
  value dont increase the loss
• No deduction for stigma or buyer resistance
  decline in value

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Limitations on deductions

• For businesses, no limitations on deductions
• For non business casualty losses, there are two
  limits
• The first 100 of each casualty loss is not
  deductible, and,
• Only amounts over 10 of Adjusted Gross Income
  are deductible
• EXCEPT, in the package of laws known as the
  Bailout Bill
• The AGI Limitation is waived for residents of the
  Hurricane Ike federal disaster area the 100
  threshold is increased to 500

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Non-itemizers

• For individuals who do not itemize their
  deductions, the Bailout Bill allows a new
  standard deduction, which is the sum of
• the basic standard deduction
• The additional standard deduction for individuals
  who are age 65 or over and/or blind
• the real property tax deduction
• Which is the lesser of the property taxes paid or
  1,000 for joint filers and
• the disaster loss deduction.
• Only for 2008 returns

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Timing of the deduction

• Casualty losses must be deducted in the year of
  loss
• If there is a reasonable prospect of recovery,
  then no loss can be taken. If, in the future,
  the prospect of recovery ceases to exist, the
  deduction can be taken in the year the prospect
  ceases to exist.

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Federal Disaster Area Rules

• For residents of Federal Disaster Areas, the
  casualty loss deduction may be taken
• in the current year (for Ike, 2008), or
• for the previous year
• If you have filed your 2007 tax return, it can be
  amended for the loss
• 2007 Returns are now due on January 5, 2009 due
  to the FDA

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Federal Disaster Area Rules

• If you have a gain on the casualty, you can defer
  the gain by buying replacement property which is
  similar or related in service or use
• Generally, the rule is within 2 years
• Residents of the FDA for Ike have 4 years to
  replace their principal residence
• Replacement of FDA property has a less
  restrictive standard of replacement property
• Basically any trade or business property is
  considered appropriate if in the disaster area

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Net Operating Losses

• If the Casualty Losses creates an NOL,
• Normal rules allow a 2 year carryback and 20 year
  carryforward
• The Bailout Bill allows residents of the FDA a 5
  year carryback
• For that portion of the NOL caused by the
  disaster

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Insurance and Income Tax

• For businesses, recovery of lost profits or sales
  are gross income
• If a business has an appropriate reason to not
  file a claim, they can still get a casualty loss
• Such as the potential for increased future
  premiums
• Basis of casualty property must be reduced by the
  allowed loss, plus insurance proceeds and other
  recoveries

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Insurance and Income Tax

• If the property is covered by insurance ,
  individuals must file insurance claims in order
  to deduct a casualty loss
• Individuals cannot deduct cost of living expenses
  when their homes are uninhabitable
• If cost of living expenses is covered by
  insurance, it is not income to the extent it pays
  for living expenses

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Filing for the casualty loss

• Use Form 4684
• If you arent comfortable with the concepts and
  the form, use a professional
• For big losses generating a NOL, the risk of
  being audited is generally high

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For more information, please contact
Contact Name David Donnelly ddonnelly_at_gddcpa.com
[phone]