Home, Business Owners Affected By Tornadoes, Other Natural Disasters Can Get Federal Tax Relief

(RIVERWOODS, ILL., May 7, 1999) – Home and business owners who suffered damage or loss to their property or business as a result of the series of tornadoes that tore through the Southern Plains recently are eligible for tax breaks that will offset those losses, according to tax and business law publisher CCH INCORPORATED (CCH).

"Taxpayers who live in areas most often affected by adverse weather – tornadoes, earthquakes, hurricanes – should be aware that that they have a number of important options under the tax law should disaster strike," said Mark Luscombe, CPA, attorney and principal federal tax analyst for CCH. "They should routinely familiarize themselves with the deductions and keep their records in a safe place to ensure they have what they need for filing if their home or business is damaged."

What is Deductible?

In general, the IRS allows certain deductions on an individual's income tax following a "casualty," a loss of property resulting from a sudden, unexpected or unusual event. A taxpayer can deduct the new amount of actual property loss resulting from damage to, or destruction of, property.

In the case of non-business property, the deduction is limited to losses arising from fire, storm, shipwreck or other casualty, such as tornadoes, hurricanes, earthquakes and abnormal flooding.

What Information Must I Provide?

To qualify for a casualty loss deduction, the taxpayer must prove to the IRS that a loss occurred, and that the loss was caused by a casualty. To support a claim, the property owner will need to provide:

  • Proof of the nature of the casualty, when it occurred, and that the loss was a direct
  • result of the casualty.
  • If the property is depreciable (such as a car), depreciation allowed or allowable.
  • Proof he or she owns the damaged property, or is legally responsible for it.
  • The fair market value of non-business property just before and after the loss.
  • A description of the damaged property and its location.
  • Salvage value of the property.
  • The cost or other adjusted basis of the property.
  • Amount of insurance or other compensation received or expected to be received for property damage. This includes the value of repairs, cleanup and disaster relief without cost by agencies or others.

Taxpayers may also use the cost of repairs to the damaged property as evidence of the loss of value if they can prove that:

  • The repairs are necessary to restore the property to its pre-casualty condition.
  • The repairs do not cover more than the damage by the casualty.
  • The amount spent for such repairs is not excessive. (Estimates from several reputable
  • companies are recommended.)
  • The repairs don't make the value of the property greater than it was before the loss
  • occurred.

Don't Forget

CCH also urges victims of disasters to consider damage to the property that is a indirect result of the casualty. Destruction of doors, windows, plants and shrubbery are examples.

What's Not Deductible?

Note that these incidental expenses relating to a casualty are not part of your casualty losses:

  • Treatment of personal injury;
  • Cleanup costs;
  • Temporary housing;
  • Car rental.

Determining the Value of Your Property

Valuation of your property is of the utmost importance when determining the amount of loss sustained in the casualty. When tax time comes, you will need to be prepared to provide your tax preparer with evidence showing the value of your property's pre-casualty value. Acceptable evidence includes:

  • Canceled checks, vouchers, receipts, purchase contracts and deeds.
  • Losses claimed for the destruction of portraits, heirlooms, keepsakes, etc. must be related to their market value, not the replacement value or sentimental value.
  • If records have been destroyed, get an appraiser's opinion on the value of the property.

Determining What Tax Year the Loss Should be Taken

Usually, casualty losses are deductible in the year that they occur, regardless of when the damage is repaired or the property is restored.

However, if there is an action for reimbursement against another party, or an insurance claim, the year when the taxpayer can claim the deduction may be postponed.

What if You are in an Official Disaster Area?

Special rules come into play if losses occur in an area determined by the President of the United States to be a "Disaster Area." In this case, a property owner can elect his or her losses in the year immediately before the tax year when the disaster occurs. This allows taxpayers who suffered losses early in 1999, for example, to get some quick relief by applying the loss to their 1998 tax bill if they are operating under a filing extension and have not yet filed their tax return for 1998.

Recent legislation has also provided greater access to tax-favored mortgage bonds for rebuilding homes in Presidentially declared disaster areas.

A taxpayer also can claim casualty losses for personal residences rendered unsafe by reason of certain disasters. These criteria must be met:

  • The residence must be in an area designated a "disaster area" by the President;
  • The residence must have been rendered unsafe as a residence because of the disaster; and
  • The owner is ordered to demolish or relocate the residence by the state or local government 120 days after the "disaster area" has been declared officially.

Special Benefits for Business Owners

Small business owners also can take advantage of "involuntary conversion rules for disaster damage" that provide further assistance to business owners whose property was damaged, or involuntarily converted, in Presidentially declared disasters. Property used in a business that is damaged by a natural disaster is eligible for "non-recognition of gain" under the law, which means that qualified replacement property can be purchased and the gain can be deferred, offering tax relief to disaster victims.

"This provides relief for businesses that are forced to suspend operations for a substantial time due to the property damage," said Luscombe. "In other words, if a business loses valuable customers during the suspension and the business fails, the owners may want to consider reinvesting their capital in a new business venture."

For more detailed information about your taxes during times of disaster, consult your local tax preparer.


CCH INCORPORATED, located in Riverwoods, Ill., is a leading provider of tax and business law information, software and services for accounting and legal professionals and their clients. The company currently publishes more than 700 print and electronic publications in the United States. CCH is a wholly owned subsidiary of Wolters Kluwer U.S. The CCH web site can be accessed at www.cch.com.

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