Authored by Amanda Wilhelm, CPA | Director, SC&H Financial Advisors, Inc.
Hurricane Ian destroyed a great deal of property along the East Coast with estimates of damage in the multiple billions. If you own property in Florida, North Carolina, or South Carolina, you may be wondering what you can do to recover your losses brought upon by Ian.
It is possible that you qualify for federal disaster aid, including tax relief. Read on to discover the details and what you need to consider in order to recover some of your losses.
What Is Considered a Hurricane Loss by the IRS?
In the event of a hurricane, you may claim a casualty loss on your tax return if your home or belongings are damaged or destroyed. Casualty losses differ from normal wear and tear or deterioration. The IRS classifies casualty loss as the damage or destruction from any sudden, unusual, or unexpected event, like:
For tax years 2018 to 2025, in order to claim a casualty loss from hurricane damage, your property must be in an area that is declared a federal disaster. Hurricane Ian was quickly declared as a disaster by President Biden, and the IRS has announced that tax relief is available for victims of this hurricane in Florida, North Carolina, and South Carolina.
How to Determine the Amount of Loss
To determine the amount of casualty loss to claim, you must first perform two calculations: the adjusted basis and the decline in fair market value.
- Adjusted basis: First, you need to calculate the adjusted basis of your property before the damage. This means the amount you originally paid for the property, along with any associated commissions, taxes, or other expenses connected to the purchase. This basis will decrease through natural deterioration or can increase if you have improved the property. If you didn’t pay for the property but received it as a gift or inheritance, you may need to calculate the adjusted basis differently and should contact one of our tax professionals.
- Decline in fair market value: According to the IRS, fair market value means the price at which a willing buyer would purchase your property on the market. The decline in fair market value is the difference between what a buyer would pay before and after the damage from the hurricane.
Once you have both the adjusted basis and the decline in fair market value, choose the smaller amount as your hurricane loss. Once you subtract any reimbursement or insurance payments from this number, you will have the total loss to use on your tax return.
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How to Report a Casualty Loss to the IRS
To report the losses from Hurricane Ian, use IRS Form 4864, “Casualties and Thefts.” This form will take you through the process of completing your claim step by step.
Here are some things to know about claiming losses.
- If the property is not used for business or as an investment, it is classified as personal-use property. With personal-use property, you must subtract $100 from the casualty losses you reported. You must also subtract 10% of your adjusted gross income (AGI) from the total of all your casualty losses for the year.
- Once you have completed Form 4864 and calculated the total of casualty losses, you must itemize this deduction on Form 1040, Schedule A. Itemized deductions are qualified expenses that reduce your taxable income.
- For some losses, these rules will not apply, and you should consult a tax professional to assist you with calculating them.
When Should You Claim a Casualty Loss on Your Tax Return?
You have two choices when you’re claiming losses on your tax return. You can claim the loss on either:
- The disaster year
- The year preceding the disaster
If you choose to treat your damage as having occurred in the previous year, you can claim the loss on the return or an amended return for that year, which may either reduce your taxes for the previous year or generate a tax refund. You will have six months from the prior year’s return to amend it.
The aftermath of a hurricane can be a very stressful situation to navigate. If you need help, SC&H is here to guide you through this difficult time so you can recover as much as possible.
Advisory Services offered through SC&H Financial Advisors, Inc. SC&H also offers advisory services through the doing business as name of SC&H Core. SC&H Financial Advisors, Inc. is a wholly owned subsidiary of SC&H Group, Inc.
The information presented is the opinion of SC&H Financial Advisors, Inc. and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation. Past performance is no guarantee of future performance.