- The Washington Times - Friday, September 21, 2001

It is said with tongue in cheek that the Lord giveth and the government taketh away. However, in the event of disaster, the tax code provides for casualty losses on your home.

Publication 547, Casualties, Disasters & Thefts, gives all the guidelines a homeowner would need to claim losses on his property from a catastrophe.

There is plenty of information from the Internal Revenue Service about the how-tos regarding losses to personal property at www.irs.ustreas.gov. Here are the highlights of what it takes to claim loss and where to go for more information.

Substantiation. First, what can homeowners claim? You may be able to deduct losses from incidents including car accidents, earthquakes, fires, floods, government-ordered demolition or relocation of a home deemed unsafe because of a disaster, weather (including hurricanes, storms and tornadoes), mine cave-ins, shipwrecks, sonic booms and vandalism (even volcanic eruptions).

Nevertheless, a bona-fide casualty loss deduction requires you to show you actually sustained a casualty loss and support the amount you take as a deduction. It's not enough to say, "I lost my home in a tornado." (Believe it or not, before and after pictures aren't enough.) You'll have to provide the date it happened, document the loss was a direct result of the casualty and that you are either the owner of the property or, if you rent, that you're contractually responsible for damage to the property.

When to deduct. If your losses were in a locale declared by the president as a disaster area, you may be able to take advantage of the loss in your current tax year, not having to wait till next year's tax-filing time to claim it.

For instance, if you sustain losses in 2001 on your home, you are allowed to either take the loss when you file your return for this year (April 2002), or you can amend last year's return (2000). If you make the latter choice, the loss is treated as having occurred in the preceding year, which may result in a lower tax for that year, often producing or increasing a cash refund.

How much loss? To figure your deduction from the loss, you must first determine the allowable loss. Here are the three steps to do that:

1. Determine your adjusted basis in the property before the casualty. (This is how much the house cost you when you bought it).

2. Determine the decrease in fair market value (FMV) of the property as a result of the casualty. (To determine fair market value, you may want to consider using a professional appraiser, the cost of which is not deductible.)

3. From the smaller of the amounts you determined in 1 and 2, subtract any insurance or other reimbursement you received or expect to receive.

What is my deduction? And now, the envelope, please. For personal-use property, such as a house that you own, the loss has two limitations called the $100 Rule and the 10 Percent Rule. First, take the total loss and subtract $100. (Don't ask me why, ask your accountant it's the federal government, remember?) Then you must subtract 10 percent of your adjusted gross income from the loss and that is your bottom line number to reduce on your income.

For example: In June, a fire destroyed your lakeside cottage, which cost $44,800 (including $4,500 for the land) several years ago. (Your land was not damaged.) This was your only casualty loss for the year. The fair market value (FMV) of the property immediately before the fire was $80,000 ($45,000 for the cottage and $35,000 for the land). The FMV immediately after the fire was $35,000 (value of the land). You collected $30,000 from the insurance company. Your adjusted gross income is $40,000. Your deduction for the casualty loss is $10,700, figured in the following manner.

1. Adjusted basis of the entire property (cost in this example) $44,800.

2. FMV of entire property before fire, $80,000.

3. FMV of entire property after fire, 35,000.

4. Decrease in FMV of entire property (line 2 minus line 3), $45,000.

5. Amount of loss (smaller of line 1 or line 4), $44,800.

6. Subtract insurance, $30,000

7. Loss after reimbursement, $14,800.

8. Subtract $100.

9. Loss after $100 rule, $14,700.

10. Subtract 10 percent of $40,000,( AGI $4,000).

11. Casualty loss deduction $10,700.

While loss on your home is a frustrating and expensive event, at least there are ways to limit the losses through this section of the tax code. Please keep in mind to always consult with a tax professional before deciding on your plan of action.

M. Anthony Carr has written about real estate for the past 12 years. Send comments and questions by e-mail (manthonycarr@erols.com).

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