Tax Deductions in a Federal Disaster Area
- If your home is damaged or destroyed in a disaster -- or condemned as unsafe afterward -- you can write off the loss of the house and its contents. To figure the deduction, take the difference between the fair market value before the disaster and the fair market value afterward, less any reimbursement. If the value of your house lost $40,000 and insurance paid $30,000, you have a $10,000 deduction. Tax law states that you must also deduct $100 from the final figure.
- Federal disaster-relief grants for immediate post-disaster needs, such as renting a new home or buying food and clothing, don't count as taxable income. If the government uses the grants to reimburse you for damage to your property or repair costs, you cannot claim the damage as a deduction. Qualified disaster relief payments are also nontaxable, unless they cover disaster costs for which you also receive an insurance payment.
- If you own a business or income-producing property such as a rental house, you don't base your losses on fair market value. Instead, the loss is your adjusted basis -- the original purchase price adjusted for expenses such as major improvements -- less any salvage value, less any insurance payments. If you lost inventory in the disaster, you can claim it as a separate loss or you can treat it as an increase in the cost of goods sold.
- Normally, you deduct casualty and damage losses in the year during which they occur. When you're in a declared disaster area, you have the option of deducting the loss on your taxes for the previous year instead. If the disaster strikes early in the current year, you can claim it when you fill out the previous year's Form 1040; if you've already submitted your tax return form for the previous year, you can file an amended return. If claiming the loss last year entitles you to a tax refund, you should see the money almost immediately.
