Devastating weather in Florida and in thesouthern part of the United States has causedproperty damage (not to mention loss of life)in the billions, and many residents are diggingout and wondering how they will deal with thelosses—financial and otherwise.
Fortunately, there are special tax breaks for peopletrying to rebuild their lives and homes destroyed by anatural disaster such as a hurricane or tornado. Considerthe following tips and advice from the tax professionalsat H&R Block (www.hrblock.com):
• Take photographs to document damage to yourproperty or belongings. This will be helpful in calculatingthe amount of your loss. It may also prove beneficialto take photos showing the condition of the propertyafter it is restored or replaced.
• Keep your receipts. Certain expenses may bedeductible or helpful in determining your loss. Forexample, you and your family may incur deductiblemedical expenses during this time. Receipts for contractingwork can establish the extent of your loss and substantiatethe use of insurance reimbursements.
• Food, medical supplies, and other forms of assistanceare not taxable. They don't reduce the lossamount claimable unless they replace lost items.
• File your insurance claim in a timely manner. Ifyour property is covered by insurance, it's important tofile the claim as soon as possible because any reimbursementmust be subtracted when calculating your loss.
• Replace property with similar property to avoidpaying taxes on any gain from insurance proceeds.However, replacement property does not have to matchitem-for-item. Because insurance proceeds for the homeand its contents are considered a common pool offunds, you can use more of the money to replace thehouse than its contents, or vice versa. If you qualify,a gain related to a personal residence can be excludedusing the sale-of-home exclusion rules.
• Reimbursements for losses are not taxable. Evenif the reimbursement is more than the basis, you don'thave to pay tax currently if you replace lost, damaged,or destroyed items within 2 years after the loss occurs.
• You may be able to claim a casualty loss on yourtax return. The loss amount is based on the lower oftwo numbers: either the price paid for the propertyplus any improvements (ie, the basis) prior to thecasualty, or the property's decline in market valuecaused by the disaster, which, in some cases, can bedetermined by repair costs. The deductible amount isreduced by insurance and most other nontaxablereimbursements. If the property is not used for business,the deductible amount is reduced by 10% of thetaxpayer's adjusted gross income and then reducedagain by $100.
• The cost of cleaning up or making repairs cannotbe considered part of your casualty loss. However, youcan use the cost for repairs as a basis to determine thedecrease in fair market value.
• Recognize special considerations for areas declareddisasters. You have up to 4 years to replace yourprincipal residence or pay tax on the gain. You canchoose to deduct a loss on the current-year return oramend the preceding year's return, whichever helps yourcurrent financial or tax situation the most. You mayhave filing and payment deadlines postponed by a timespecified by the IRS. Any interest that normally wouldapply to late payments is waived in this situation.