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[ DAVID J. PHILLIP | AP ]

IRS ANNOUNCES TAX RELIEF FOR TEXAS SEVERE WINTER STORM VICTIMS

Did you suffer from the power outages?  Did the freeze kill your landscaping?  Did you have some plumbing bills for busted pipes?  With all of this, you didn’t have enough to claim on your insurance because your deductible is high?  There may be deductions that you can take on your 2020 tax return, even though the incident occurred in 2021.  And the great news is that “Severe Ice Storm” has been declared a federally declared disaster.  

Taking these deductions can be a bit confusing.  You’ll encounter terms like “safe harbor,” “fair market value,” and even “corrosive drywall!”  The rules are a bit complex and there are different methods to calculate your loss depending on your situation and losses.  GLO is here to help. 

Introduction

We seem to be living in an age of natural disasters. Floods, fires, hurricanes, tornados, and other disasters often dominate the news.  Here in Texas, Winter Storm Uri caused losses potentially reaching $200 billion, more than the costs of Hurricanes Harvey or Ike. (Texas Winter Storm Costs)  The silver lining is that for some of us, we don’t have to wait until next year to claim the losses from the storm.  For this storm, you can claim the losses on your 2020 return!

Casualty Losses from a federally declared disaster waive the 10% adjusted gross income limitation.  Even if you have insurance, you may be able to take a casualty loss for your insurance deductible.  

Because this is a federally declared disaster, disaster losses aren’t limited to individual personal-use property and may be claimed for individual business or income-producing property and by corporations, S corporations, and partnerships. If you suffered a disaster loss, you are eligible to claim a casualty loss deduction and to elect to claim the loss in the preceding tax year—you can take the loss on THIS year’s tax return.

Let’s dig into the issues.

Only Casualty Losses Are Deductible

Damage to personal property caused by a disaster is deductible only if it qualifies as a casualty loss. A casualty is damage to, destruction of, or loss of property from events such as fires and floods that are sudden, unexpected, or unusual.

Many, but not all, casualty losses are covered by insurance. You can’t deduct such losses to the extent they are insured. Moreover, suppose you have insured yourself against the loss. In that case, you must file a timely insurance claim, even if that insurance claim will result in the cancellation of your policy or an increase in premiums.

Limits on Casualty Losses

Unfortunately, you can’t deduct all your casualty losses. From 2018 through 2025, you can only deduct personal casualty losses due to a federally declared disaster or to the extent you have casualty gains.

For example, a homeowner can claim a casualty loss if a wildfire (declared a federal disaster) destroys his home. But he gets no deduction if a faulty fireplace caused the fire and destroys his home (no federal disaster).

The law imposes major limits on your casualty-loss deduction. The general rule says that you may not deduct the first $100 and then deduct your loss only to the extent that it exceeds 10 percent of your adjusted gross income. Your final hurdle is that you then deduct the loss as an itemized deduction. These rules significantly reduce or even eliminate many casualty loss deductions.

Fortunately, some casualty losses are not subject to these limits, including disaster losses sustained due to a federally declared major disaster from January 1, 2020, to February 25, 2021. Instead, losses from such disasters are subject to a $500 floor with no 10 percent adjusted gross income reduction. Under this rule, you deduct the loss whether or not you itemize. Even if you don’t itemize, you add the deductible loss to your standard deduction.

You have a choice for losses from a federal disaster: claim the loss in the year of the disaster or on the prior year’s return if it’s before October 15. This can result in a quick refund of all or part of the tax you paid that year.

Let’s Talk About Landscaping

The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in fair market value of your property. You may be able to measure your loss by what you spend on the following.

  • Removing destroyed or damaged trees and shrubs, minus any salvage you receive.
  • Pruning and other measures taken to preserve damaged trees and shrubs.
  • Replanting necessary to restore the property to its approximate value before the casualty.

Let’s look at some examples

Example 1

Darlene is a homeowner with an insurance deductible of $5000.  During Winter Storm Uri, while she was away from her home, water pipes in her attic broke and caused damage to flooring, ceiling and furniture.  She contacted a plumber that she had used previously and repairs were begun right away, but because of the damage, she had to relocate to a hotel while plumbing work was completed.  Her insurance would not cover hotel and meals.  Darlene’s costs totaled $18,950 as follows:

Hotel and meals while out of the home$500
Plumbing Repairs$7,500
Flooring Repairs$4,000
Drywall and Painting$3,500
Furniture Replacement$2,500
Food lost due to electricity loss$950

Darlene can use the replacement method to calculate her loss, but she wouldn’t get the full amount.  If the furniture she was replacing was 5 years old, she only get a 50% deduction.

She will not get to write off food that was ruined and she wouldn’t be able to write off out-of-pocket living expenses. Casualty losses are recognizing the decrease in value of property so her casualty loss deduction would be $4,500($5,000 deductible less $500 threshold)

Example 2

Jorge was fortunate in that the interior of his home was spared from damage during Winter Storm Uri.  Unfortunately, his landscaping and sprinkler system did not fare as well.  His home owner’s insurance does not cover items outside of the house and garage.  He sought bids for landscape replacement and received 2.  He contacted his existing sprinkler system company to make those repairs. Bids and costs were as follows:

Landscape bid #1 (incumbent)$9,000
Landscape bid #2$7,500
Sprinkler System rebuild$2,500

Under the rules, Jorge would get the lesser of the 2 bids.  His casualty loss deduction would be $9,500 ($7,500 + $2,500 – $500).

Example 3

Colin and Sara own 4 rental properties and all were occupied during the storm.  Damage to the 4 units are as follows:

Unit #1$1,500
Unit #2$7,000
Unit #3$2,400
Unit #4$0

The owners of the rental property would take a dollar for dollar deduction for $10,900 without taking a casualty loss because it is an income-producing property.

What about the Tenants?

The tenants in Unit #1 lost $1,000 in clothes and possessions.   Tenant #1 would have to file his loss under renter’s insurance.  
Tenants in Unit #2 have moved out and are terminating the lease as they believe the unit is not in livable condition.   Tenant #2 has nothing to report.  As taxes are based on cash received.  Colin and Sara don’t get to take a deduction for loss rental income.  However, there may be breaking lease fees.   
Tenants in Unit #3 needed to stay in a hotel for 5 days (5 x $150) while plumbing and drywall was repaired.    Tenant #3 had expenses which might go to Colin and Sara, if they choose to reimburse the tenant for hotel fees.  However, those fees would be an expense not a casualty loss  
Tenants in Unit #4 experienced no direct damage because the renter, seeing the approaching storm, turned off and drained the water system.  However, when the water was restored to the unit, leaks were discovered in the water line leading from the water meter to the unit.  Tenant #4 has nothing to report, but Colin and Sara can deduct the repair expenses.  

Let’s hope we don’t have another Uri.  If you have any questions about how to deduct your losses, don’t hesitate to contact us.

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