Posted by Thomas G Kinsella, ATP

Losses Due to Casualties, Disasters, and Theft

Losses Due to Casualties, Disasters, and Theft

You can generally deduct losses from accidents and thefts related to your home, household items, and vehicles if the loss is caused by a federally declared disaster declared by the President. It is impossible to deduct casualty and theft claims covered by insurance unless you make a refund claim on time and reduce the loss by the amount of any expected refund or reimbursement.

A federally declared disaster is a disaster that occurs in an area declared by the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief Emergency Assistance Act. It includes a declaration of emergency or major disaster for the rule of law.


Casualty Losses

The casualty loss can result from the damage, destruction, or property loss due to any sudden, unexpected or unusual event, such as floods, hurricanes, tornadoes, fires, earthquakes, or volcanic eruptions. A casualty does not include normal wear and tear or progressive damage.

There are three types of accidental claims, disaster losses, federal casualty losses, and qualified disaster losses. The three types of losses are known as federally declared disasters, but each loss's requirements vary.

If your property is for personal use or is not fully destroyed, your casualty's loss amount is less than:

§ Adjusted basis of your property, or

§ Decrease in the fair market value of your property following the accident

If your property is commercial or income-generating, such as a rental property, and is destroyed, the amount of the loss will be its adjusted basis.

 

Theft losses

Theft is the withdrawal and taking of money or property with the intent to deprive the owner. The seizure must be illegal per the law of the state in which it took place and must have been carried out for criminal purposes. The amount of the lost theft is generally the adjusted basis of your property, as your property's fair market value immediately after the theft is considered zero.



Losses on Ponzi Projects: Special rules may be applied to losses resulting from Ponzi schemes' theft.


Insurance or other reimbursements

You must reduce the loss, whether it is from an accident or theft, by any residual amount and by any insurance or other reimbursement that you receive or expect to receive. Your property's adjusted basis is usually the cost, increased or decreased by certain events, such as improvements or depreciation.

The reduction in fair market value can be determined by an appraisal or, if certain conditions are met, by the cost of repairing the asset.


Capital gain

When the amount you receive for insurance or other reimbursements is more than the property's cost or adjusted basis, you have a capital gain. In general, you should include the gains in your income; unless you are eligible to defer capital gains on the deposit or have a personal injury capital gain for the fiscal year, you may be able to deduct the portion of personal casualty that is not assigned to a federally declared disaster area, provided the loss does not exceed personal gain.


Claiming the loss

Individuals can claim their losses in the event of an accident and theft as an itemized deduction in Schedule A (Form 1040), Itemized Deductions (or Schedule A (Form 1040-NR), if you are a non-resident foreigner). For properties that you own for your personal use, you must deduct $100 from any casualty or theft during the year after deducting the remaining amount and any insurance or other reimbursement. Then add up all of these values and subtract 10% of the adjusted gross income from that total to calculate the allowable casualty and theft losses for that year.

If you have an eligible disaster loss in the event of a claim, you can choose to deduct the loss without itemizing your deductions. The casualty's net loss must not exceed 10% of the adjusted gross income to qualify for the deduction. It would still reduce the casualty loss by $ 500 after any residual amount and any other reimbursement.

Report casualties and theft losses on Form 4684. Use Section A for personal use and Section B for commercial or income-generating properties. If the personal property has been damaged, destroyed, or stolen, you can consult a tax professional to explain IRS publication 584. For losses involving commercial property, see Publication 584-B. These publications are useful for claiming losses on Form 4684; keep them with your tax records.


When to deduct

Casualty claims are deductible in the year the claim is filed, normally the year in which the claim was submitted. You have not suffered any loss if you have a reasonable prospect of recovery through a reimbursement. Suppose you have a casualty loss from a federally declared disaster in an area that requires public or individual assistance (or both). In that case, you may choose to treat the loss as if it had occurred in the year immediately preceding the tax year during which you suffered the loss in the event of a claim and may deduct the loss on your return or the amended return from the previous tax year.

Losses due to theft are generally deductible in the year the asset is discovered to have been stolen unless you have a reasonable prospect of recovery through a claim. If so, no deduction is available until the fiscal year in which you can reasonably determine whether or not you will receive a refund.



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Thomas G Kinsella, ATP
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