When To Report
Gains and Losses
If you receive an insurance or other reimbursement that is more than
your adjusted basis in the destroyed or stolen property, you have a gain from the
casualty or theft. You must include this gain in your income in the year you receive the
reimbursement, unless you choose to postpone reporting the gain as explained earlier.
Casualty loss. Generally, you
can deduct a casualty loss only in the tax year in which the casualty occurred.
This is true even if you do not repair or replace the damaged property until a later year.
(However, see Disaster Area Losses, later, for an exception.)
Theft loss. You generally can
deduct theft losses only in the year you discover your property was stolen. You
must be able to show there was a theft, but you do not have to know when the theft
occurred. However, you should show when you discovered that your property was missing.
Loss on deposits. If your loss is a loss on deposits at an insolvent
or bankrupt financial institution, see Loss on Deposits, earlier.
Lessee's loss. If you lease
property from someone else, you can deduct a loss on the property in the year your
liability for the loss is fixed. This is true even if the loss occurred or the
liability was paid in a different year. You are not entitled to a deduction until your
liability under the lease can be determined with reasonable accuracy. Your liability can
be determined when a claim for recovery is settled, adjudicated, or abandoned.
Disaster Area Losses
This section discusses the special rules that apply to Presidentially
declared disaster area losses. It contains information on when you can deduct your
loss, how to claim your loss, how to treat your home in a disaster area, and what tax
deadlines may be postponed. It also lists Federal Emergency Management Agency (FEMA) phone
numbers. (See Contacting the Federal Emergency Management Agency (FEMA), later.)
A Presidentially declared disaster
is a disaster that occurred in an area declared by the President to be eligible for
federal assistance under the Disaster Relief and Emergency Assistance Act.
When to deduct the loss. If you have a casualty loss from a disaster
that occurred in a Presidentially declared disaster area, you can choose to deduct that
loss on your return or amended return for the tax year immediately preceding the tax year
in which the disaster happened. If you make this choice, the loss is treated as having
occurred in the preceding year.
 Claiming a
qualifying disaster loss on the previous year's return may result in a lower tax for that
year, often producing or increasing a cash refund.
If you do not choose to deduct your loss on your return for the earlier year, deduct it
on your return for the year in which the disaster occurred.
Example. You are a calendar year taxpayer. A flood damaged your
home this June. The flood damaged or destroyed a considerable amount of property in your
town. The President declared the area that includes your town a federal disaster area as a
result of the flood. You can choose to deduct the flood loss on your home on last year's
tax return. (See How to deduct your loss in the preceding year, later.)
Disaster loss to inventory. If your inventory loss is from
a disaster in an area declared by the President of the United States to be eligible for
federal assistance, you may choose to deduct the loss on your return or amended return for
the immediately preceding year. However, decrease your opening inventory for the year of
the loss so that the loss will not be reported again in inventories.
Home made unsafe by disaster. If
your home is located in a Presidentially declared disaster area, your state or local
government may order you to tear it down or move it because it is no longer safe to
live in because of the disaster. If this happens, treat the loss in value as a casualty
loss from a disaster. Your state or local government must issue the order for you to tear
down or move the home within 120 days after the area is declared a disaster area.
Figure your loss in the same way as for casualty losses of personal-use property. (See Figuring
a Loss, earlier.) In determining the decrease in FMV, use the value of your home
before you move it or tear it down as its FMV after the casualty.
Unsafe home. Your home will be considered unsafe only if
both of the following apply.
- Your home is substantially more dangerous after the disaster than it was before the
disaster.
- The danger is from a substantially increased risk of future destruction from the
disaster.
You do not have a casualty loss if your home is unsafe due to dangerous conditions
existing before the disaster. (For example, your house is located in an area known for
severe storms.) This is true even if your home is condemned.
Example. Due to a severe storm, the President declared the
county you live in a federal disaster area. Although your home has only minor damage from
the storm, a month later the county issues a demolition order. This order is based on a
finding that your home is unsafe due to nearby mud slides caused by the storm. The loss in
your home's value because the mud slides made it unsafe is treated as a casualty loss from
a disaster. The loss in value is the difference between your home's FMV immediately before
the disaster and immediately after the disaster.
How to deduct your loss in the preceding year. If you choose to deduct your loss on your return or amended return for the tax
year immediately preceding the tax year in which the disaster happened, include a
statement saying that you are making that choice. The statement can be made on the return
or can be filed with the return. The statement should specify the date or dates of the
disaster and the city, town, county, and state where the damaged or destroyed property was
located at the time of the disaster.
Time limit for making choice. You must make this choice to
take your casualty loss for the disaster in the preceding year by the later of the
following dates.
- The due date (without extensions) for filing your income tax return for the tax year in
which the disaster actually occurred.
- The due date (with extensions) for filing the return for the preceding tax year.
Example. If you are a calendar year taxpayer, you ordinarily
have until April 15, 2003, to amend your 2001 tax return to claim a casualty loss that
occurred during 2002.
Revoking your choice. You can revoke your choice within 90
days after making it by returning to the Internal Revenue Service any refund or credit you
received from making the choice. However, if you revoke your choice before receiving a
refund, you must return the refund within 30 days after receiving it for the revocation to
be effective.
Figuring the loss deduction. You must figure the loss under
the usual rules for casualty losses, as if it occurred in the year preceding the disaster.
Example. A disaster damaged your home and destroyed your
furniture. This was your only casualty loss for the year. The President later declared the
area to be eligible for federal assistance. The cost of your home and land was $134,000.
The FMV immediately before the disaster was $147,500 and the FMV immediately afterward was
$100,000. You separately figured the loss on each item of furniture (see Figuring the
Deduction, earlier) and arrived at a total loss for furniture of $3,000. Your
insurance did not cover this type of casualty loss, and you expect no reimbursement for
either your home or your furniture.
You choose to amend your previous year's return to claim your casualty loss for the
disaster. Your adjusted gross income on your previous year's return was $71,000. You
figure your casualty loss as follows:
| |
|
|
|
Furnish- |
| |
|
House |
|
ings |
| 1. |
Cost |
$134,000 |
|
$10,000 |
| 2. |
FMV before disaster |
$147,500 |
|
$8,000 |
| 3. |
FMV after disaster |
100,000 |
|
5,000 |
| 4. |
Decrease in FMV (line 2 - line 3) |
$47,500 |
|
$3,000 |
| 5. |
Smaller of line 1 or line 4 |
$47,500 |
|
$3,000 |
| 6. |
Subtract estimated insurance |
-0- |
|
-0- |
| 7. |
Loss after reimbursement |
$47,500 |
|
$3,000 |
| 8. |
Total loss |
$50,500 |
| 9. |
Subtract $100 |
100 |
| 10. |
Loss after $100 rule |
$50,400 |
| 11. |
Subtract 10% of $71,000 AGI |
7,100 |
| 12. |
Amount of casualty loss deduction |
$43,300 |
Claiming a disaster loss on an amended return. If you have already filed your return for the preceding year, you can claim a
disaster loss against that year's income by filing an amended return. Individuals
file an amended return on Form 1040X.
How to report the loss on Form 1040X. You should adjust
your deductions on Form 1040X. The instructions for Form 1040X show how to do this.
Explain the reasons for your adjustment and attach Form 4684 to show how you figured your
loss. See Figuring a Loss, earlier.
If the damaged or destroyed property was nonbusiness property or employee property and
you did not itemize your deductions on your original return, you must first determine
whether the casualty loss deduction now makes it advantageous for you to itemize. It is
advantageous to itemize if the total of the casualty loss deduction and any other itemized
deductions is more than your standard deduction. If you itemize, attach Schedule A (Form
1040) and Form 4684 to your amended return. Fill out Form 1040X to refigure your tax on
the rest of the form to find your refund.
Records. You should keep the records that support your loss
deduction. You do not have to attach them to the amended return.
Grants. You do not have to
include grants received under the Disaster Relief and Emergency Assistance Act in your
gross income. However, you cannot deduct a casualty loss to the extent you are
specifically reimbursed for it by the grant.
Federal loan canceled. If part
of your federal disaster loan was canceled under the Disaster Relief and Emergency
Assistance Act, it is considered to be reimbursement for the loss. The cancellation
reduces your casualty loss deduction.
Qualified disaster relief payments. Qualified disaster relief payments received in tax years ending after September
10, 2001, are not included in the income of individuals. These payments are not
subject to income tax, self-employment tax, or employment taxes (social security,
Medicare, and federal unemployment taxes). No withholding applies to these payments.
Qualified disaster relief payments include payments you receive (regardless of the
source) for the following expenses.
- Reasonable and necessary personal, family, living, or funeral expenses incurred as a
result of a Presidentially declared disaster.
- Reasonable and necessary expenses incurred for the repair or rehabilitation of a
personal residence due to a Presidentially declared disaster. (A personal residence can be
a rented residence or one you own.)
- Reasonable and necessary expenses incurred for the repair or replacement of the contents
of a personal residence due to a Presidentially declared disaster.
Qualified disaster relief payments also include amounts paid to those affected by the
disaster by a federal, state, or local government in connection with a Presidentially
declared disaster.
Qualified disaster relief payments do not include:
- Insurance or other reimbursements for expenses, or
- Income replacement payments, such as payments of lost wages, lost business income, or
unemployment compensation.
Special rules for main home in a disaster area. Special rules regarding gains may apply to insurance proceeds you receive
because of the damage or destruction of your main home (whether owned or rented) or
its contents. For a discussion of these rules, see Gains Realized on Homes in Disaster
Areas in the instructions for Form 4684.
Postponed Tax Deadlines
The IRS may postpone for up to 1 year certain tax deadlines of
taxpayers who are affected by a presidentially declared disaster. The tax deadlines
the IRS may postpone include those for filing income and employment tax returns, paying
income and employment taxes, and making contributions to a traditional IRA or Roth IRA.
If any tax deadline is postponed, the IRS will publicize the postponement in your area
and publish a news release, revenue ruling, revenue procedure, notice, announcement, or
other guidance in the Internal Revenue Bulletin (IRB).
Who is eligible. If the IRS postpones a tax deadline, the following
taxpayers are eligible for the postponement.
- Any individual whose main home is located in a covered disaster area (defined later).
- Any business entity or sole proprietor whose principal place of business is located in a
covered disaster area.
- Any individual who is a relief worker affiliated with a recognized government or
philanthropic organization and who is assisting in a covered disaster area.
- Any individual, business entity, or sole proprietor whose records are needed to meet a
postponed deadline, provided those records are maintained in a covered disaster area. The
main home or principal place of business does not have to be located in
the covered disaster area.
- Any estate or trust that has tax records necessary to meet a postponed tax deadline,
provided those records are maintained in a covered disaster area.
- The spouse on a joint return with a taxpayer who is eligible for postponements.
- Any other person determined by the IRS to be affected by a Presidentially declared
disaster.
Covered disaster area. This is an area of a Presidentially
declared disaster in which the IRS has decided to postpone tax deadlines for up to 1 year.
Abatement of interest and penalties. The IRS may abate the interest and penalties on underpaid income tax for the
length of any postponement of tax deadlines.
Contacting the Federal Emergency Management Agency (FEMA)
If you need to contact FEMA for general information, call 202-646-4600
(not a toll-free call) or visit its web site at www.fema.gov.
If you live in an area that was declared a disaster area by the President, you can get
information from FEMA by calling the following phone numbers. These numbers are only
activated after a Presidentially declared disaster.
- 1-800-621-3362.
- 1-800-462-7585, if you are a TTY/TDD user.
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