FAQ about Tax Reporting
posted over 5 years ago by WeedLTRG from Weed Long Term Recovery Group
Here are some questions and responses from Dorian Aiello at Aiello Goodrich and Teuscher CPA firm. Do you have other questions about tax reporting related to the fire? Email them to firstname.lastname@example.org and we will research them for you.
Q. How should I claim my damages from the fire as deductions or losses on my tax return? To claim a casualty loss from a fire on non-business property, you must file form 1040 and itemize your deductions on schedule
A. The loss is calculated as the decrease in fair market value (FMV) of the property before and immediately after the casualty. If the property is covered by insurance, a timely insurance claim should be filed and proceeds from insurance will decrease the allowable loss taken on the tax return.
There are two limits to calculate the allowable deduction on the income tax return. First you reduce the loss by $100, then you further reduce the loss by 10% of adjusted gross income. The loss is calculated on Form 4684, Casualties and Thefts and then transferred to Schedule A.
Q. Do I have to report the value of any cash or gifts I received as a result of the fire damages? A. Generally, food, medical supplies and other forms of assistance received are not taken into consideration in reducing the casualty loss and they also are not taxable. Insurance, grants, gifts and other payments received to help after a disaster are considered reimbursements only if they are specifically designated to repair or replace the property. The IRS has ruled that the receipt of a gift from a relative or friend does not reduce a casualty loss provided there is no limitation or directive at which the money is to be used.
Q. Do I have to report any settlement income from my insurance company on my tax return (whether or not I used the money to replace items or for other uses)? A. If the property covered by the fire was covered by insurance, a timely claim for reimbursement of a loss should be filed, otherwise, no deduction as a casualty loss is allowed. If the insurance reimbursement exceeds the tentative loss, the taxpayer may have taxable income to report. For non-business personal property there is no requirement that the proceeds be used to “replace” all of the claimed loss. It is important to remember, to the extent that the insurance reimburses for the actual loss, nothing will be reported for tax purposes (for personal property losses).
Q. What do I need to know about reporting losses if the property I lost was a rental, not my primary residence? A. IRS code section 1033 deals with “Involuntary Conversions” and have special rules that allow the postponement of gain on property destroyed by a disaster and qualifying replacement property is acquired within a certain time period. The cost of the replacement property must be at least as much as the amount of insurance recovery received to escape taxation. Many taxpayers find that the reimbursement for losses from the insurer is more than needed to rebuild, in this case a portion of the excess will be taxable income. If the proceeds are converted into other property that is similar or related no gain is recognized. You have two years to perform the conversion.
If you do not elect to use IRC 1033 and not reinvest you would calculate gain or loss based on the following calculation:
Total Insurance Proceeds Minus adjusted basis in the property (Net of Depreciation) - original land value
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