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The rules for claiming disaster losses changed with tax reform

If you're a Minnesota snowbird, you may have been watching Hurricane Dorian with special attention. Was your second home or vacation property damaged? Or, you may have a farm or agricultural property that was damaged in the spring flooding. Either way, you might have a casualty loss deduction to claim on your federal tax return.

If you do, you should be aware that the rules changed with the Tax Cuts and Jobs Act (TCJA).

A casualty loss is the loss of your property, in whole or in part, from a sudden, unexpected event like a hurricane, flood, fire, tornado or earthquake, for example. It is not normal wear and tear or something that occurs over time. A casualty loss is deductible as long as you itemize your deductions.

However, in the past you could claim casualty losses in many situations. Under the TCJA, you can only deduct casualty losses in two situations:

  • The loss is attributable to a federally declared disaster (you'll need the FEMA disaster declaration number
  • If you have personal casualty gains listed on Form 4684, the deduction is available to the extent it does not exceed your gains

It's important to note that you can't claim business casualty losses on property used in the performance of services as an employee, even to offset gains. This is because the TCJA eliminated miscellaneous itemized deductions.

How much should you claim as your loss?

If you have a casualty loss from a federally-declared disaster, you should talk to your tax attorney about how to calculate your losses, as each calculation is individual. However, here are some basic rules:

  • Personal use property or property that is only partially destroyed: Claim your adjusted basis or the decrease in your property's fair market value, whichever is lower.
  • Business property that is completely destroyed: Claim your adjusted basis (original price plus any long-term improvements, minus any depreciation you've previously claimed).

If you were able to salvage the property or if you received insurance reimbursement, you must subtract the remaining value or the insurance money from your claim. Additionally, you must subtract $100 for each disaster and also 10% of your adjusted gross income.

Back up your deduction with good record-keeping. For example, you could create a detailed report of the losses with before-and-after pictures and receipts. You may want a professional appraisal of the value of the property and the loss.

Finally, you may qualify for extensions to file and to pay your taxes if you have been affected by a disaster. Check with the IRS or your tax attorney for details.

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