The cataclysmic losses Hurricane Katrina inflicted shine fresh light on a murky corner of the federal tax code: tax write-offs for storm damages to houses.
It’s a subject worth the attention of any homeowner, since it applies not just to monster hurricanes, but to floods, tornadoes, fires and earthquakes. The Internal Revenue Code allows owners of houses damaged by natural disasters to seek and obtain tax relief for losses not covered by insurance.
The bad news: the hoops and snares you face to figure your write-off relief. Not only can the rules be tricky, but you may end up with a far lower write-off than you think you deserve.
Here’s a quick overview of the rules. To begin the process, you need to calculate how much tax-deductible damage you suffered. IRS regulations prescribe a two-step initial test: First, calculate the decrease in the market value of your property. Normally an appraiser is hired to render before-and-after valuations.
Next, figure out your “adjusted basis” for tax purposes in the property. In general, that means what you originally paid for the house, plus any capital improvements you’ve made, minus any earlier casualty loss write-offs or depreciation deductions you’ve taken. Your accountant or tax adviser can help you arrive at this number.
Now take the lesser of those two figures as your starting point – either the amount of the decline in market value or your adjusted basis.
Next, you jump through three more hoops: First, subtract whatever payments you received from your property insurance policy. Say, for example, that you received an insurance check for $175,000 after the storm. Your gross loss for tax-deduction purposes is thus $250,000 (adjusted basis) minus $175,000 (insurance), which is $75,000.
Now you subtract $100 from that amount. (Don’t ask why – it’s the rule.) Now the loss is down to $74,900 for the purposes of this hypothetical. Finally the IRS requires you to subtract 10 percent of your adjusted annual gross income for the tax year of the loss – that’s the bottom-line income number on page 1 of Form 1040 – from the loss amount.
Say your adjusted gross income was $150,000. You take 10 percent of that ($15,000) off the $74,900, and now you’re down to your tax-deductible loss amount: $59,900. If your damaged property is located in a presidentially declared disaster area, as is the case for thousands of victims of Katrina, you can have the deduction applied to last year’s federal tax return as an amendment, rather than this year’s. That should get you a cash refund much quicker.
Julian Block, a Larchmont, N.Y.- based tax attorney and author of “The Home Seller’s Guide to Tax Savings,” calls the federal storm-damage tax-deduction rules “harsh” because people with moderate incomes sometimes end up with little or no relief.
Other snares in the rules to be aware of, according to Block:
Don’t expect to get deductions for extraordinary personal expenditures you made following the storm for fuel, temporary lighting, moving and rental of temporary living quarters.
Keep detailed records and photos documenting your claims for storm-damage deductions. To help you inventory what you’ve got, the IRS offers a handy guide, Publication 584, Casualty, Disaster and Theft Loss Workbook, available at www.irs.gov. At the same website you can download the basic rules to storm-damage write-offs, Publication 547.
