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A casualty loss can be either personal or business. A personal casualty loss is the loss of property not connected with a trade or business and not incurred in any transaction entered into for profit. Form 4684 is used to report both business and personal losses. There are rules that are unique to calculating the deduction for personal casualty losses, principally the $100 per casualty floor and the 10% of AGI floor (explained later). Special rules apply in a presidentially declared disaster area. Call Hull Company Accountants, Inc. for details.
A casualty loss must result from a destructive force such as a fire, automobile collision, hurricane or other storm, flood or similar event. Court decisions and Revenue Rulings have developed the overall concept that the term casualty refers to an identifiable event of a sudden, unexpected, or unusual nature (Rev. Rule 76-134). To be sudden, the event must be one that is swift and precipitous and not gradual or progressive (Rev. Rule 72-592). Expenses for the treatment of personal injuries, cost of temporary housing and additional living expenses as a result of casualty loss are not deductible as part of the casualty loss.
Loss of property to progressive deterioration is not deductible as a casualty loss. This is because the damage results from a steadily operating cause or normal process rather than from a sudden event. Therefore, even though this area has been declared a disaster area due to the drought, losses of landscaping due to the drought are not considered a casualty and not deductible. To be deductible a drought related loss generally must be incurred in a trade or business or a transaction entered into for profit (IRS Pub 547).
The amount of the casualty loss generally is the lesser of:
1. The difference in fair market value of the property immediately before and immediately after the casualty.
2. The adjusted basis for determining loss from the sale or other disposition of the property (Reg. 165-7(b)).
The casualty loss amount is reduced by the amount of any insurance, other compensation, or reimbursement received, and by salvage value. Disaster relief such as food, medical supplies and other forms of assistance do not reduce the casualty loss unless they are replacements for lost or destroyed property.
Except for disaster losses, a loss is generally deductible in the year in which it is sustained. This rule applies even if salvage from the property is not disposed of or replacements are not made until a later year. If there exists a claim for reimbursement for which there is a reasonable prospect of recovery, the loss must be reduced by that amount. When you receive a reimbursement for a previously deducted loss in a later year, you do not amend the original return. Instead, the reimbursement is included as income in the year received to the extent of the tax benefit yielded by the earlier deduction.
Note: If you fail to file an insurance claim for the loss, only the portion of the loss that would not have been covered by insurance is deductible.
A Presidentially Declared Disaster is a disaster that accrued in an area declared by the President to be eligible for federal assistance under the Disaster Relief and Emergency Assistance Act. If you have a disaster that occurred in a Presidentially declared disaster area, you can choose to deduct that loss on your return or amend your return for the tax year immediately preceding the tax year in which the disaster happened. Claiming a qualified disaster loss on the previous year's return may result in a lower tax for that year and produce a cash refund. The election to claim a disaster loss deduction in a year prior to its occurrence is made by filing an amended return and attaching an election statement to the return.