Many local taxpayers own homes and other property in the areas impacted by Hurricane Ian. In the wake of Hurricane Ian, the states of Florida, South Carolina, and North Carolina have been declared federal disaster areas. Individuals who have property that was destroyed or damaged by the hurricane may be able to deduct a casualty loss that is not covered by insurance or other reimbursements.
For personal-use property, the loss is calculated by subtracting any insurance proceeds or other reimbursements received or expected to be received from the lesser of:
- The decrease in the property’s fair market value as a result of the hurricane
- The adjusted basis in the property before the hurricane.
Fair market value is the price at which the property could be sold to a willing buyer in the open market. The decrease in fair market value is the difference between the property’s fair market value immediately before and after the hurricane. The adjusted basis in the property is the amount originally paid for the property increased by the cost of any improvements or additions made to the property and decreased by depreciation deductions, if applicable. It is possible that taxpayers will have a taxable gain if insurance proceeds or other reimbursements received exceed the adjusted basis in the property.
Generally, taxpayers must itemize deductions on their individual tax returns in order to deduct a casualty loss attributable to personal-use property. The loss must first be reduced by $100 for each casualty event that occurred during the year and then reduced by 10% of the taxpayer’s adjusted gross income.
Casualty losses on business and income-producing property, such as rental property, are not subject to the $100 and 10% limits. Instead, the deductible loss is determined by subtracting any insurance or other reimbursements received or expected to be received as well as any salvage value from the adjusted basis in the property.
Affected taxpayers can claim a casualty loss from a federally declared disaster in the year disaster occurred or the year preceding the disaster. A taxpayer has only six months from the original due date of the prior years’ return to amend it.
The IRS has announced that Individuals who live or have records in an affected area now have until February 15, 2023 to file their 2021 tax returns, provided they had a valid extension. However, tax payments for 2021 that were originally due by April 18, 2022 are not eligible for relief. The February 15, 2023 deadline also applies to fourth quarter estimated tax payments normally due by January 17, 2023 and business tax returns with an original or extended due date of October 17, 2022. The IRS automatically identifies and applies the tax relief to taxpayers located in the disaster areas. Affected taxpayers who reside or have a business outside the disaster areas should call the IRS disaster hotline at 866-562-5227 to request tax relief.
If you suffered a loss related to Hurricane Ian and require assistance determining the extent of the taxable loss, please contact your tax preparer.
Article submitted by Jennifer Wallace, CPA