How to deal with a property loss

Published 12:00 am Tuesday, January 6, 2004

Press Release

With hurricanes, tornadoes and wind storms always abeing a threat to the residents of the River Parishes, there is no place along the Mississippi immune to the fury of Mother Nature.

In fact, every year, millions of people face property damage from unexpected events. Although taxes are likely to be one of the last things on people’s minds when nature strikes, it’s good to know that Uncle Sam can help to relieve your financial burden. According to the Society of Louisiana CPAs (LCPA), a casualty loss deduction can help offset some of your loss.

Understand what

qualifies as a

casualty loss

“The Internal Revenue Service classifies a casualty as the damage, destruction, or loss of property resulting from a sudden, unexpected, or unusual event,” notes Raymond P. Ladouceur, JD, CPA, LCPA president. “Casualties likely to qualify for deductions include auto accidents, civil disturbances, hurricanes, earthquakes, explosions, fires, floods, hail, ice and snow, vandalism, winds, and tornadoes. Loss from theft, including larceny, robbery and embezzlement also qualify as a casualty.”

Gradual damage

doesn’t count

To qualify for a casualty deduction, the event that causes the damage or loss must be sudden and swift, not slow or progressive. For example, gradual damage caused by mildew and mold doesn’t qualify for a deduction. But if a pipe bursts and ruins your carpet and floor, your loss would qualify. Other examples of non-deductible losses include those caused by termites, dry rot, corrosion, and rust.

Determining your


To determine the deductible amount of a casualty or theft loss, you will need to do several calculations. Start by determining the fair market value of the property before and after the damage. (Fair market value is the price for which you could sell the property to a knowledgeable buyer.) Next, establish your basis in the property (generally, your cost plus improvements, less any depreciation taken). Generally, your loss is the lesser of the decrease in fair market value or the remaining basis.

For example, the IRS cites the total destruction of a painting worth $100,000 that was purchased for $1,000. The decrease in fair market value is $100,000, but since the buyer’s basis is less, the loss is limited to $1,000, the buyer’s actual investment in the property.

After you determine the amount of your loss, you must deduct any insurance reimbursement you have received or an estimate of what you expect to receive. For losses of business property, the remainder is your deductible loss. For thefts or casualties of personal or family property, your deductible loss is much more limited. After subtracting your reimbursements, you must subtract $100 for each casualty, theft or accident event suffered during the year. Then, you must then reduce your total of deductible losses by 10 percent of your adjusted gross income. You must deduct these personal casualty losses as itemized deductions.

Be aware that you cannot deduct a loss unless you file a timely insurance claim if you have coverage. Insureds who choose not to file can deduct only the portion of the loss that would not have been covered had a claim been filed.

Disaster areas qualify for special treatment

Usually a casualty or theft loss is deductible only in the year the event took place. However, when an area is declared a federal disaster by the President, you have the option of deducting the loss on the previous year’s tax return. This may allow you to get an immediate tax benefit rather than waiting to claim it. Deducting in one year or the other may be profitable for income tax purposes based on that year’s income.

Recordkeeping is


Declaring a casualty or theft deduction can help minimize the financial impact of a disaster. But since it might also attract the attention of the IRS, CPAs say it is important that you can substantiate your deduction. While it is not necessary to submit your documentation with your return, you should retain information that supports your calculated loss. Photos of the lost or damaged items, receipts and appraisals, and police reports are all proofs of loss.

Establishing the deductibility of a casualty loss or theft can be complicated. If you have any questions, consult a CPA.

To find a CPA who can help you with your personal or business tax and financial matters, visit the LCPA’s Web site ( and use the CPA Locator Service.

Copyright © 2003 Society of Louisiana Certified Public Accountants