Personal Casualty Losses
Hurricane Sally is a federally declared disaster and therefore personal casualty losses can be taken by taxpayers who itemize deductions. The casualty loss deduction is subject to
- $100 floor per casualty AND
- 10% of adjusted gross income (AGI) limitation
- The loss must exceed the $100 floor and 10% of AGI before it “counts” as a deduction.
Casualty losses can be taken for damaged property as well as property that is totally destroyed. The amount of the loss is the lesser of
- The adjusted basis of the property OR
- The reduction in the property’s fair market value caused by the casualty
- The loss must be reduced by the amount of any salvage value and insurance or other reimbursement received.
The IRS has provided safe harbors for calculating residential real property losses.
- Estimated Repair Cost Safe Harbor Method – This method is available for losses of $20,000 or less. A taxpayer may use the lesser of two repair estimates prepared by two separate and independent contractors licensed in accordance with state or local regulations.
- Insurance Safe Harbor Method – A taxpayer may determine the decrease in fair market value by using the estimated loss determined in reports prepared by the taxpayer’s insurance company.
- Contractor Safe Harbor Method – A taxpayer may use the contract price for repairs as set out in an itemized contract prepared by a licensed contractor. The contract must be binding and signed by the taxpayer and the contractor.
The IRS has also established safe harbors for personal belonging losses based on replacement cost adjusted 10% for every year the item is owned.
Additionally, the IRS has announced relief related to Hurricane Sally. In summary, the filing and payment due dates for various individual and business tax returns due on or after September 14, 2020 have been extended to January 15, 2021. Please note this does not include an extension to pay your 2019 tax liability, it only extends the time to timely file the tax return. The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. Currently this includes Baldwin, Escambia and Mobile counties in Alabama, but taxpayers in localities qualifying for individual assistance added later to the disaster area, elsewhere in the state and in neighboring states, will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov. The Alabama Department of Revenue is also offering similar relief. For more information, please go to the Alabama Department of Revenue Website.
If you have any questions, please call your accountant at CSB or our main office at 251-343-1012.