Taxpayers who are victims of Hurricane Sandy have the opportunity of claiming unreimbursed disaster-related casualty losses on their federal tax returns by filing Form 4684 Casualties and Thefts. The loss may be deducted on either the upcoming 2012 return or on an original or amended 2011 return. Claiming the loss on a 2011 return should result in an earlier refund. However in some cases waiting to claim the loss on the 2012 return may result in a greater tax saving, depending on your personal income tax situation.
The deductible loss is calculated by starting with the lesser of:
- Adjusted cost basis (original purchase price plus improvements), or
- Difference between the fair market value before and after the hurricane, (alternatively the cost of repairing and restoring the home to its original value)
Ten percent of the taxpayer’s Adjusted Gross Income (AGI) is then deducted from the loss to arrive at the deductible amount. To illustrate, let’s assume John’s house was damaged in the storm with the following details:
Cost of house (in 1950) $10,000
Fair Market Value before the Hurricane $500,000
Fair Market Value after the Hurricane $200,000
John’s Adjusted Gross Income $100,000
John may only deduct the lesser of his adjusted basis of $160,000 ($10,000 purchase price plus $150,000 of improvements) or the change in fair market value of $300,000 (original fair market value of $500,000 minus $200,000 fair market value after the storm), which leaves him with only a $160,000 loss before deducting another $10,000 (10% of his AGI of $100,000) to arrive at a deductible loss of $150,000.
To view Form 4684, click here: IRS Casualty Loss Form. If you would like assistance with amending your 2011 tax return and /or assessing your casualty deduction please contact one of Urbach & Avraham’s tax consultants at 732-777-1158.