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It has been a week of rising flood waters and destruction on the front range of Colorado. My heart goes out to all the victims, especially those that lost loved ones or had their home destroyed during the floods.

“The damage was so widespread that officials declined to venture a guess at how many homes were lost.” - The Coloradoan

“Flooding in 15 Colorado counties has damaged or destroyed nearly 19,000 homes, according to the Colorado Office of Emergency Management.” - The Denver Post

These are tragic circumstances and hard to comprehend when they are happening. However, when tax time approaches you need to remember the casualty loss deduction. To qualify the loss must be “sudden, unexpected, and unusual”. An earthquake, fire, flood, tornado, hurricane and even some car accidents would all qualify.

You will need to know your adjusted basis in the property, the fair market value (before and after the loss) and how much, if any, insurance reimbursement was or will be received. I won’t go over the process for finding your adjusted basis, but if you are interested check here. Fair market value will have to be determined by a competent appraiser for real property.

The IRS has a great example of how to figure the deduction. Take a look:

In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. (Your land was not damaged.) This was your only casualty or theft loss for the year. The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). The FMV immediately after the fire was $35,000 (value of the land). You collected $130,000 from the insurance company. Your adjusted gross income for the year the fire occurred is $80,000. Your deduction for the casualty loss is $6,700, figured in the following manner.

1. Adjusted basis of the entire property (cost in this example)......………$144,800
2. FMV of entire property before fire…………………………………,,,……$180,000
3. FMV of entire property after fire…………………………………….………$35,000
4. Decrease in FMV of entire property (line 2 − line 3)……….……………$145,000
5. Loss (smaller of line 1 or line 4)………………………………….………..$144,800
6. Subtract insurance…………………………………………………….……$130,000
7. Loss after reimbursement…………………………………………………...$14,800
8. Subtract $100…………………………………………………………………….$100
9. Loss after $100 rule……………………………………………………….....$14,700
10. Subtract 10% of $80,000 AGI……………………………………………….$8,000
11.Casualty loss deduction……………………………………………………..$ 6,700

So why did I highlight the two lines in red? There are actually three deduction limit rules. The first is a $100 limit on each and every event that causes a loss. You had three events take place in one year? Each is subject to the $100 limit. The 10% limit of your AGI is only applied once for the entire year for all of your losses. The third limit deals with losses to property that you paid for that are used by you as an employee. (That is not covered in this example).

One last thing, the IRS issued a statement today regarding the floods in Colorado. The president declared Adams, Boulder, Larimer and Weld counties federal disaster areas.

“Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.”

If you need help figuring your casualty loss for the year please call or schedule an appointment.