Casualty and Theft Losses

Casualty and Theft Losses

If you have suffered personal losses from theft or disasters such as fire, flood, larceny, or embezzlement, you may be able to deduct them if you can itemize. Personal casualty and theft losses are reported on Form 4684, Casualties and Thefts, Section A and entered on Schedule A. If the President declares an area a federal disaster area, special criteria apply.

See the following information relating to casualty and theft losses:

Personal Casualty or Theft Losses:
Each casualty and theft loss event is reduced by any reimbursement and by $100, and the yearly loss is further reduced by 10% of your adjusted gross income. To deduct casualty or theft losses, you must:

File a timely insurance claim for reimbursement of your loss. The part of the loss that is not covered by insurance is deductible.
Deduct your loss in the year that the casualty or theft occurred unless you are in a federally declared disaster area.
Preventative measures against disasters are not tax deductible as losses. Examples of preventative measures are building a levee to prevent future flooding or installing a security system after a break-in. Instead, you capitalize these as permanent improvements and add them to the basis of your property.

Personal Casualty or Theft Gain:
You may have a gain if you receive more in reimbursement than the basis of the destroyed or damaged property. If you receive property that is similar as reimbursement, a gain generally does not need to be reported. However, you may pay tax on the gain if you receive unlike property or money as reimbursement. If the gain results because your principal residence was destroyed, you are allowed to treat it as if you had sold your residence and can exclude up to $250,000 ($500,000 if Married Filing Jointly). You generally can choose to postpone all or part of the gain on a principal residence if, within two years of the end of the first tax year in which any part of the gain is realized, you purchase similar property or property related in service or use to the damaged, destroyed, or stolen property.

Federal Disaster Losses:
If the President of the United States has declared your area a federal disaster area, you have a choice of which year you may claim the loss. You may claim the loss for the year in which it occurred if you file your current-year tax return by the due date (with extensions). Or you may amend your prior-year tax return by filing Form 1040X, Amended U.S. Individual Income Tax Return, and claim losses in the previous tax year. By doing this, you can get your refund for the loss sooner than waiting until the following year.

After comparing your tax situation and adjusted gross income for both years, you might find it to your tax advantage to claim the loss in one year rather than another. Specify the date or dates of the disaster and the city, town, county, and state where the property was damaged or destroyed on your return.

If you receive any insurance proceeds for unscheduled personal property in your home, no gain is taxable because you have no income to report. Unscheduled property is anything in your home not listed on your insurance policy. Other insurance proceeds from damage to your home and its contents are lumped into a single sum and may result in a taxable gain.

Federal Disaster Gains:
Recognizing Gains - If the amount of insurance or other reimbursement exceeds the amount you paid for similar replacement property purchased within the replacement period, you may recognize a gain that is considered taxable income.
Replacement Period - The law provides for a four-year replacement period for replacing principal residences instead of the usual two years.
Renters - Renters receiving insurance proceeds for damaged or destroyed property qualify for relief if their rented home is their primary residence.

Reimbursement:
A reimbursement is a money payment specifically allocated to replace or repair the property through insurance or other IRS-approved methods. The following qualify as a reimbursement:

Insurance:
The part of a federal disaster loan that you are not required to pay back
Court-awarded damages minus lawyer fees and other necessary expenses
Repair, restoration, or clean-up services provided by relief agencies like the Red Cross
Theft loss paid by a bonding company