(EDITOR’S NOTE: This article was originally published on August 12, 2010, during a string of rainy summer days that were causing flooding. Over the last few weeks, I have noticed a lot of people looking at this article, so I am bringing this article back to the top of the blog.)
If you live in Iowa, you know that it has rained pretty much every day this summer (and that’s not much of an exaggeration!). Many people have suffered water damage from flooded basements, and others have suffered other types of storm damage from hail and even tornadoes. What are the tax consequences of storm damage? Can you deduct anything?
As with most things involving tax law, the answer is, yes (maybe). You are allowed to deduct “casualty and theft” losses on your tax return, but there are certain rules and limitations.
First, you have to calculate how much casualty loss you have. Your casualty loss for tax purposes may be different from the dollar amount of damage done. For tax purposes, your casualty loss is the lesser of: 1) Your basis in the property, or 2) The change in fair-market value caused by the casualty event.
Your home, which you paid $100,000 for, is destroyed by a flood. The fair-market value of the home before the flood was $120,000. The fair-market value of the home after the flood was $0, which means the change in fair-market value caused by the flood is $120,000. You casualty loss for tax purposes is $100,000.
Once you’ve calculated this amount, you’re still not done with the number-crunching. Next, you subtract out any insurance reimbursements. From that, you subtract $100. Then you subtract 10% of your Adjusted Gross Income. Whatever is left can be claimed as an itemized deduction on your tax return. If you claim the standard deduction, you can’t claim a casualty loss (there can be exceptions to this if you live in a federal disaster area).
Continuing with Example 1, assume that you are reimbursed $50,000 by your insurance company, and that your Adjusted Gross Income is also $50,000. You calculates your deductible casualty loss as follows:
$100,000 tax loss – $50,000 reimbursement – $100 – $5,000 (10% of AGI) = $44,900 deductible casualty loss
Generally a casualty loss is claimed on the tax return for the year the casualty occurred. However, if the area you live in is declared a federal disaster area, you have the choice of claiming it in the year it occurred, or going back and amending your prior-year tax return to claim the loss.