Ryan Snyder, BridgeTower Media Newswires
Many have watched the recent hurricanes ravage the coastlines of Texas and Florida with a dread about the ultimate outcome of their rental properties or second homes. While assessing damages and planning recovery, the Internal Revenue Service Code has some tools to help those suffering from the effects of the storms.
Casualty losses can be claimed against a taxpayer’s income for losses that are sudden, unexpected or unusual. This freed-up cash flow can be vital to the recovery effort. There are some important things to remember when preparing to file a return with a casualty loss.
The first step is accumulating documentation. It is important to document the damage that occurred as quickly as possible. The taxpayer should be taking photos and other steps to document the extent and severity of the damages. This evidence will be needed to support the assertions the taxpayer will be making and failing to ensure this first step occurs may make it difficult or impossible to defend challenges to their position in the future.
Next, the taxpayer will want to accumulate documents to support their basis in any property damaged. This is the cost of the property to the taxpayer, typically what they paid for it. If appropriate measures were taken prior to the event, these documents should be readily available. If they aren’t available, the taxpayer can take certain steps such as contacting the title company, escrow company or bank that handled the purchase. These entities should be able to produce the required documentation.
The taxpayer can obtain property tax assessments to determine land versus building ratios when determining the allocation of the purchase price. For any improvements made to the affected property, the taxpayer can request copies of contractor bills if they are available. If the construction was financed, the bank may have copies of this information that they can provide to the taxpayer. Attorneys and court records can be useful in the case of inherited property.
For personal property, obtaining old catalogs can support cost basis or contacting the taxpayer’s credit card company for records. Fair value can be determined by viewing prices of similar assets at secondhand stores. Drawing a diagram of damaged property and then drawing in the locations of personal property can help the taxpayer take a complete inventory of property within a dwelling. This will help ensure that any losses claimed are complete to maximize the benefits the taxpayer can receive.
To determine the current market value of the assets, the taxpayer can enlist the help of their insurance company to obtain comparable sales for similar assets. A competent appraisal is typically the best form of evidence available to determine the fair market value of the property immediately following the casualty. Cost of repairs can be used in certain circumstances when documenting the casualty loss. Documentation of the cleanup and other repairs should be maintained by the taxpayer in the case that this methodology is employed.
Normal wear and tear does not constitute a casualty loss and any losses must be reduced by any insurance proceeds received. If the property is located in an area that is declared a federal disaster, the taxpayer may be able to amend the preceding year’s tax return for the current year casualty loss. The ability to amend a previously filed return allows the taxpayer to receive a refund now if they are eligible to claim casualty losses. These funds can then be put to immediate use in the recovery efforts.
Losses are defined as the decrease in fair market value of the property from immediately before the casualty loss to right after the event occurred. These losses are subject to certain limitations based on the use of the assets and the taxpayer’s unique position. Your trusted advisor can help you navigate these nuances.
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Ryan Snyder, CPA is a senior manager at Mengel, Metzger, Barr & Co. LLP. He can be reached at Rsnyder@mmb-co.com.
