Casualty Losses - An Overview

The following is a brief overview of casualty losses and how they might impact your tax return. The information provided is by no means complete and for further details, you should contact this office.

Casualty Loss Definition - A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

A sudden event is one that is swift, not gradual or progressive.

An unexpected event is one that is ordinarily unanticipated and unintended.

An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.

Disaster Losses - Disaster losses are casualty losses that occur in a geographical area declared a disaster region designated by the President of U.S. Generally, casualty losses must be taken in the year in which they occur. However, if the casualty occurs in a designated disaster region, the losses can be taken either in the year of the loss or the year prior to the loss. When to take the loss depends upon a number things including tax rates for each year, the amount of the loss, whether or not the loss is used up in one tax year and the taxpayer need for cash, generated more quickly by filing the loss in the preceding year. In addition, if the casualty loss exceeds a taxpayer's income for the year, the loss can be carried back as a net operating loss to the tax return for the 2nd preceding year and then carried forward. For 2009 only, the loss could have been carried back five years.

Determining the Loss - Generally, the deductible loss is the lesser of the cost or fair market value of each item lost in the casualty. Once the loss is determined for each individual item, then those amounts are added together to determine the total loss for each different casualty event.

Business or Personal Casualty - Casualty losses are categorized as either business or personal casualty losses. Those that are business are fully deductible without limitations. Personal casualty losses, on the other hand, are first reduced by $100 ($500 for 2009 only) for each event and then the total of all events for the year is reduced by 10% of your annual income (AGI). For 2009, the 10% of AGI reduction is waived in disaster areas. In addition, for personal casualty losses, you must itemize your deductions in order to take advantage of the loss. Note that for 2009, if the loss occurred in a Presidential disaster region, the loss can be added to the taxpayer's standard deduction.

Insurance Reimbursement - Your casualty loss must be reduced by the amount of any insurance reimbursement. Generally, if you are insured for your loss and the insurance company offers you an amount that is deemed by the insurance company to be the FMV of the item or items lost in the casualty, you will generally not have a casualty loss unless the combination of insurance loss limits and deductibles exceed the personal loss limitations.