In the past few days, Hurricane Harvey made landfall on the Texas coast, leaving us immediate and devastating impact. Most of us in Houston have been severely affected by flooding issues since last Saturday.
While the full economic impact remains unknown at this point, Risk modeler Chuck Watson of Enki Research said yesterday that he projected total economic loss may reach $42 billion. For taxpayers who have suffered economic loss due to a natural disaster, you can claim a casualty loss deduction on your federal income tax return. Casualty loss, in the past, has earned the highest ranking as the most desirable deduction because such deduction is not subject to the passive loss rules. There are two ways to claim for casualty loss deduction – the appraisal method or cost of repairs method. I am going to provide further details on how you can use one of the two methods in this article today.
Method One – Appraisal
If you are using this method, you will need a qualified appraiser to assess and document the fair market value (FMV) of your property right before and after the Hurricane. In addition, the appraisal will also need to consider any general market decline that may affect both the undamaged and damaged items, which often occurs with the casualty, in order to accurately provide a fair estimate of actual loss to the property damage.
Method Two – Repair costs
Using the second method may be more straightforward for some because what taxpayer needs to do is simply compile a list of all repair costs paid to fix all the damages, leaks, cracks and etc. While you may use the cost of repairs as your deduction proof, the burden of proof is on the taxpayer to show that repairs done are necessary to restore the property to its original condition prior to the hurricane, repairs were not excessive, and there was no major appreciation in the value of the property before and after the repairs. Last but not least, IRS rules state that you may not deduct any portion of the loss that may be reimbursed by your insurance company, until you are certain that your casualty loss will not be recovered from your insurance provider. More updates to come on change of IRS tax filing deadlines for 2016!
Need more guidance on how to prepare for your 2016 taxes, go to https://www.xqcpahouston.com/links-and-useful-resources.
As always, you can call my office at 832 795 9612 to schedule for a tax meeting if you have additional concerns or questions. We are here to help!
Charlene Quah, CPA, Certified Tax Coach, QuickBooks ProAdvisor