Did you know that you can deduct personal property losses caused by Hurricane Harvey?
The IRS allows you to deduct the value of the losses incurred on personal property as a result of Hurricane Harvey.
There are two ways to assess the loss: 1) measure the decrease in the property’s Fair Market Value (FMV), or 2) measure the property’s adjusted cost basis.
The total cost of repairs to restore the property to its condition prior to the Hurricane, though not explicitly part of a casualty loss, can be used to measure the FMV decrease if the following apply: the repairs are made, the repairs are necessary to restoring the property to its pre-Harvey condition, the repairs are not excessive, and the property value post-repairs does not exceed the value of the property before the damages were incurred.
You cannot deduct casualty losses that are covered by insurance unless you file a timely claim for reimbursement and deduct any reimbursement or expected reimbursement amount from the claim.
Personal property losses are considered itemized deductions on Schedule A of your tax return, along with your property taxes, mortgage interest, and charitable deductions. Your allowable deductions for these losses are those that are greater than the sum of $100 and 10% of your Adjusted Gross Income (AGI).
For example, consider that a couple incurred $25,000 in personal property losses during Hurricane Harvey. These losses are not subject to insurance reimbursement and the couple’s 2017 AGI is $100,000. In this situation, the couple is allowed to deduct $14,900 in casualty losses, ($25,000 - $100- (10% of $100,000)).
There’s an additional benefit to taking a casualty loss for personal property damages. Under IRC Section 165(i), the IRS allows you to treat the loss as if it occurred in the year immediately preceding the tax year in which the disaster took place (i.e. deduct the loss in 2016, not 2017).
IRC Section 165(i) is particularly helpful if your AGI was lower in 2016 than 2017, and your casualty losses amount to slightly less than 10% of your 2017 AGI. Thus, your 10% threshold is lower in 2016 than 2017, making it easier for you to qualify for a deduction if you claim the loss on an amended 2016 tax return. This way, you can deduct the losses in a manner that both suits your financial situation and maximizes your tax refund.
It is important to note that these IRS rules apply only to casualty losses incurred on personal property. If you sustained damage to business property, the losses are deductible without itemization and are not subject to any limitations. If you were affected by Hurricane Harvey, please consult your CPA or tax professional for advice before taking any action.
