Transcript David Donnelly , Gainer, Donnelly & Desroches

Casualty Gains and Losses
David Donnelly
Gainer, Donnelly & Desroches, LLP
www.gddcpa.com
CERTIFIED PUBLIC ACCOUNTANTS | 713.621.8090
5847 San Felipe, Suite 1100 Houston, Texas 77057
Definition of a Casualty
• The Code defines Casualty Losses as “losses
[which] arise from fire, storm, shipwreck, or
other casualty, or from theft”;
• Clearly, losses from Hurricane Ike fit within the
definition;
• In general, the case law indicates that the loss
must be sudden
– Termite damage, for instance, is not a casualty
Calculation of the Loss
• The loss is the lesser of
– The difference between Fair Market Value immediately before
and immediately after the casualty; or
– Adjusted basis of the property
• If the loss is total, and adjusted basis is higher than Fair
Market Value before the loss, the loss is the adjusted
basis
– Adjusted basis is generally cost less accumulated depreciation
• The Loss is reduced by the insurance and/or other
compensation received
• Casualty Gains are possible
Fair Market Value
• Appraisals are necessary if the property is not repaired;
– Cost of appraisal is a miscellaneous itemized deduction subject
to the 2% floor
• Cost to repair partially destroyed property to its original
condition is evidence of decline in value
– Loss is limited to the costs to repair to original condition; any
repairs which increase the value of the property over its precasualty value don’t increase the loss
• No deduction for ‘stigma’ or ‘buyer resistance’ decline in
value
Limitations on deductions
• For businesses, no limitations on deductions
• For non business casualty losses, there are two limits
– The first $100 of each casualty loss is not deductible, and,
– Only amounts over 10% of Adjusted Gross Income are deductible
• EXCEPT, in the package of laws known as the “Bailout
Bill”
– The AGI Limitation is waived for residents of the Hurricane Ike
federal disaster area; the $100 threshold is increased to $500
Non-itemizers
• For individuals who do not itemize their
deductions, the ‘Bailout Bill” allows a new
standard deduction, which is the sum of:
– the basic standard deduction;
– The additional standard deduction for individuals
who are age 65 or over and/or blind;
– the real property tax deduction;
• Which is the lesser of the property taxes paid or $1,000 for joint filers; and
– the disaster loss deduction.
• Only for 2008 returns
Timing of the deduction
• Casualty losses must be deducted in the year of
loss;
• If there is a reasonable prospect of recovery,
then no loss can be taken. If, in the future, the
prospect of recovery ceases to exist, the
deduction can be taken in the year the prospect
ceases to exist.
Federal Disaster Area Rules
• For residents of Federal Disaster Areas, the
casualty loss deduction may be taken:
– in the current year (for Ike, 2008), or
– for the previous year
• If you have filed your 2007 tax return, it can be amended for
the loss
– 2007 Returns are now due on January 5, 2009 due to
the FDA
Federal Disaster Area Rules
• If you have a gain on the casualty, you can defer
the gain by buying replacement property which
is similar or related in service or use
– Generally, the rule is within 2 years
– Residents of the FDA for Ike have 4 years to replace
their principal residence
– Replacement of FDA property has a less restrictive
standard of replacement property
• Basically any trade or business property is considered
appropriate if in the disaster area
Net Operating Losses
• If the Casualty Losses creates an NOL,
– Normal rules allow a 2 year carryback and 20 year
carryforward
– The Bailout Bill allows residents of the FDA a 5 year
carryback
• For that portion of the NOL caused by the disaster
Insurance and Income Tax
• For businesses, recovery of lost profits or sales
are gross income
• If a business has an appropriate reason to not
file a claim, they can still get a casualty loss
– Such as the potential for increased future premiums
• Basis of casualty property must be reduced by
the allowed loss, plus insurance proceeds and
other recoveries
Insurance and Income Tax
• If the property is covered by insurance ,
individuals must file insurance claims in order to
deduct a casualty loss
• Individuals cannot deduct cost of living expenses
when their homes are uninhabitable
• If cost of living expenses is covered by insurance,
it is not income to the extent it pays for living
expenses
Filing for the casualty loss
• Use Form 4684
• If you aren’t comfortable with the concepts and
the form, use a professional;
• For big losses generating a NOL, the risk of
being audited is generally high
For more information, please contact:
Contact Name
David Donnelly
[email protected]
(713) 621-8090
www.gddcpa.com
CERTIFIED PUBLIC ACCOUNTANTS | 713.621.8090
5847 San Felipe, Suite 1100 Houston, Texas 77057