IRS Helps Taxpayers to More Easily Calculate Personal Casualty Losses from 2017 Hurricanes by Arkadiy (Eric) Green, CPA
Posted on February 06, 2018 by Arkadiy (Eric) Green
Individual taxpayers who suffered losses to their homes and personal belongings during the 2017 hurricane season should be aware that the IRS introduced safe harbor methods to calculate those losses on their 2017 income tax returns that they will file in April of this year.
Under the IRS guidance issued in December 2017, taxpayers with casualty losses of $20,000 or less may use an Estimated Repair Cost Method by using the lesser of two repair estimates prepared by two separate, independent and licensed contractors to determine a property’s decrease in fair market value (FMV). The estimates must detail the itemized costs required to restore the property to the same condition it was in immediately before the casualty event. Any improvement costs that would increase the property’s value above its pre-casualty condition must be excluded from the calculation.
For casualty losses to personal-use residential real property and personal belongings of $5,000 or less, taxpayers may rely on a De Minimis Safe Harbor Method under which they may use a good faith estimate of the cost of repairs required to restore the real property to its pre-casualty condition and the decrease in the fair market value of the individual’s personal belongings. Under this method, taxpayers must maintain meticulous records describing the affected real and personal property and detailing the methodology used for estimating the loss.
The Insurance Safe Harbor Method allows taxpayers to rely on reports from their homeowners’ or flood insurance companies that estimate the amount of losses they sustained to personal-use residential real property.
In addition to these safe harbor methods, individuals who suffered casualty losses to personal-use residential property as a result of a federally declared disaster may use the following methods: (1) the Contractor Safe Harbor Method under which the taxpayers may rely on contract price for the repairs specified in a binding contract prepared by a licensed independent contractor and signed by the individual and the contractor, or (2) the Disaster Loan Appraisal Safe Harbor Method, which allows taxpayers to use the estimated loss contained in appraisals prepared for the purpose of obtaining a Federal loan or loan guarantee from the Federal Government. To determine the amount of casualty or theft losses for personal belongings located in a federally declared disaster area, individuals may also use a Replacement Cost Safe Harbor Method that relies on a table that values the property based upon such factors as the amount of time the individual owned the property prior to the casualty event.
In a separate IRS announcement, the agency detailed safe harbor methods to specifically help victims of Hurricanes Harvey, Irma and Maria determine the amount of losses these storms inflicted on their homes located in Texas, Louisiana, Florida, Georgia, South Carolina, Puerto Rico, and the U.S. Virgin Islands. The calculations are based on cost indexes that consider the size of a home as well as the location and extent of its damages.
It is important to note that the IRS issued this updated guidance in December 2017, just prior to the passage of Tax Cuts and Jobs Act, which overhauls the tax code beginning on Jan. 1, 2018. The new law limits the tax break for personal casualty losses to those damages that result from a disaster declared by the president of the United States. On the surface, it appears that victims of major disasters, such as hurricanes and other federally declared disasters, would still be allowed to deduct personal casualty losses in the future, while homeowners affected by fires, flooding, winter storms and other casualty and theft events may no longer benefit from this form of tax relief. However, the actual implications of the new law will not be fully known until later this year when the IRS issues technical guidance on how it will address the provisions of the new tax law.
With offices in South Florida, Berkowitz Pollack Brant is well aware of the complicated tax and insurance issues individuals and businesses face when preparing for and recovering from natural disasters, such as hurricanes. Our advisors and accountants work closely with clients to insure and support claims of business interruption and assess of damages to property and businesses for purposes of claiming casualty loss tax deductions.
About the Author: Arkadiy (Eric) Green, CPA, is a director of Tax Services with Berkowitz Pollack Brant, where he works with real estate companies, commercial and residential developers, property management companies, real estate investors and high-net-worth individuals to structure investments and complex transactions for maximum tax efficiency. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at email@example.com.