As the ongoing recovery efforts continue for those affected by Hurricane Sandy, we wanted to remind you to gather the following information to assist in preparing your tax return and help calculate any resulting casualty gain or loss.
The starting point in calculating the personal gain or loss is taking a look to see which is smaller your basis or the drop in Fair Market Value (FMV). For business losses only the adjusted basis is taken into consideration.
Your basis is the amount paid when the property was purchased and is increased by any capital improvements made during the subsequent years of ownership. (For example: the cost of landscaping, remodeling a kitchen or bathroom.)
The drop in FMV is more difficult to calculate. Obtaining an appraisal from a competent appraiser, which reflects the physical damage to property not the FMV before the storm is an acceptable method. The IRS will also accept the “cost of repairs” method to determine the FMV decrease. Be aware the actual repair amount needs to be known (i.e. completed) by the due date of the tax return. Estimates for the cost of repairs will not be accepted. The repairs will be accepted as evidence of the loss in value as long as the following are met; the repairs must have been necessary to restore the property to its condition immediately before the casualty, the amount for repairs are not excessive and the repairs do not cover more than the damaged suffered.
The third important piece of documentation needed is your insurance reimbursement. Please be aware that in order to claim a personal casualty loss a taxpayers must file a timely insurance claim for any damaged insured property or the loss will be denied.
If a personal casualty loss results after this calculation it is further reduced by 10% of the taxpayers Adjusted Gross Income (AGI) and an additional flat $100.
The loss is then reported as an itemized deduction on Schedule A of your individual tax return form 1040, for 2012 or you elect to amend your prior year
tax return to claim the loss. This may allow for a quicker refund if the loss generates or increases a refund from the prior year.
In the event the taxpayer has a casualty gain, the gain can be deferred if the taxpayer purchases qualified replacement property within the replacement period. This period has been extended from 2 to 4 years for a principal residence destroyed in a federally declared disaster area.
Please contact us for assistance with calculating your casualty loss or gain and allow us to address your individual situation and circumstances.