If you reside in one of the areas recently devastated by a hurricane, wildfire or another natural disaster, or own investment property in one of those places, you may be able to salvage some tax relief. Federal tax laws allow victims of disasters to claim casualty losses of personal property on their tax returns, although the write-offs are limited. What's more, if you suffer a loss in a designated disaster area and you're due a tax refund, you may be able to speed up its arrival.
Generally, you're eligible to claim a casualty loss caused by an event that is "sudden, unusual, or unexpected." This, of course, includes natural disasters such as hurricanes, fires, tornados, floods, earthquakes, and the like. But no deduction is allowed for normal "wear and tear" of property over time. Your casualty losses for the year, including any losses due to theft or vandalism, are grouped on your tax return.
However, after you've subtracted any insurance reimbursements, the deduction for the remaining damages is subject to these two rules.
Suppose you own an apartment building in Houston that was destroyed by Hurricane Harvey and your unreimbursed loss was $50,000. If your AGI for 2017 is $100,000, your deductible loss is limited to the amount by which it exceeds 10% of AGI—$10,000—leaving you with $40,000 minus $100, or $39,900.
Because the IRS often challenges deductions that appear to be inflated, it's important to obtain an independent appraisal of damage to your real estate or other property by a reputable third party.
Compared with those who have suffered regular casualty and theft losses, people in federally designated disaster areas can obtain faster relief. Normally, you claim a casualty loss on the tax return for the tax year in which it occurred. However, a disaster-area loss may be deducted on a return for the year preceding the tax year of the event.
So, in the example involving Hurricane Harvey, instead of waiting to file your 2017 tax return—due by April 15, 2018—to claim your loss, you could file an amended tax return for 2016, and your refund would be sent to you within a matter of weeks.
Similarly, if you suffer a disaster-area loss early in 2018, you don't have to wait until you file your 2018 return in 2019 to claim the loss. You can opt to take it on the 2017 return you'll file in 2018.
These tax rules are designed to provide people who have casualty losses with a measure of relief to help them get back on their feet. Review these rules with your professional advisers if your personal property is damaged or destroyed.