Deducting Losses Associated with Hurricane IKE
Losses associated with a Hurricane are called “Casualty Losses” and reported on Form 4684. Below is an explanation of what is allowed and how to determine how your Casualty Loss is determined.
Casualty Losses are the LOWER of 1.) or 2.) below:
1.) Cost or Basis -
- Cost is what you paid for an item. (If the receipt was destroyed, then you need to approximate the amount you paid.).
- If you inherited an item, your basis is Fair Market Value (FMV) at the date of their death.
- If you were gifted an item, your basis is the same as the person who gifted the item. Basis for gifted items is what is called “carryover” basis. (Your basis is the same as theirs).
- If any items were “depreciated” then your basis is reduced by the amount of depreciation claimed.
2.) Fair Market Value (FMV) at the date of loss.
Once the above step is completed, you must reduce the loss by:
1. Insurance proceeds you have received.
2. Insurance proceeds you expect to receive.
3. Other aid you received for the items, such as FEMA reimbursements for the losses associated with the property.
A schedule needs to be prepared to substantiate the losses. This does not need to be attached to the tax return, but should be retained to submit to the IRS if asked to prove the loss. The schedule should include a detail of all items with the following headings:
1.) Description of item.
2.) Date Acquired. (approximate if records are lost)
3.) Cost/Basis of item. (approximate if records are lost)
4.) FMV of the item at the date of loss.
Below are examples for illustrative purposes. These examples do not account for insurance proceeds or other proceeds received for the losses, nor do they account for additional improvements in properties. They are simple examples to help you understand the rules of losses for Federal Income Tax Purposes:
EXAMPLE 1 - You purchased a lawnmower on 1/1/2000 for $ 1,000 for mowing your personal residence. At the date of loss, the lawnmower was worth $ 500. Per above rules, your loss is the lower of 1.) Cost/Basis or, 2.) FMV at the date of loss, so your loss in this example is $500.
EXAMPLE 2 – Same as above, except you also used the lawnmower in your rental properties and claimed depreciation on the mower on your tax return in the amount of $ 700. Your basis would be $ 300 ( $1,000 cost less $ 700 depreciation claimed), which would result in a loss of $ 300.
EXAMPLE 3 – You purchased a house on 1/1/1990 for $ 100,000. Before the Hurricane your house was worth $ 200,000 and you estimate your losses at $150,000 (due to appreciation and replacement cost of the lost items). Per the above rules, your losses are the lower of 1.) “Cost/Basis” or, 2.) FMV. This example would have a loss, not to exceed, $ 100,000.
As you can see, losses per Federal Income Tax Purposes are not “replacement” cost, as used for insurance purposes. If all records were lost due to the Hurricane, reasonable care should be done in preparing, or estimating, the “cost/basis” of an item.
I hope you have a better understanding about claiming losses due to Hurricane IKE. If you have additional questions, please call my office.
Sincerely,
Robert Dee Jr
