How to Handle A Property Loss the Right Way and Reconstruct Records
Many companies and individuals across the U.S., unfortunately, had property destroyed by hurricanes and other natural disasters in 2022. It may take years to repair and recover what you can, and some of the losses are surely irreversible. Make sure you reconstruct your records to account for the loss properly on your tax return based on the guidance below.
How to Reconstruct Records
It is suggested that you start by getting copies of your previously filed tax returns from the IRS. You can get free transcripts immediately online, call 800-908-9946, or request them via mail by filling out Form 4506-T, Request for Transcript of a Tax Return. Write the appropriate disaster designation, such as “HURRICANE HARVEY,” in red letters across the top of Forms 4506-T and 4506 to speed up the process and avoid the normal fees.
For real estate (business or personal, including land) you will want to document the damage as best you can. Taking pictures or videos is a great way to document the damage. If documents were destroyed, contact the title company and get copies of the necessary documents. Next, you will need to establish the basis or fair market value of the property. This can be done by looking at comparable sales or contacting an appraisal company/mortgage company for information they have about values in the area. If no other records are available, check the county assessor’s office for historic records.
For personal property, it can be difficult to reconstruct records, but here are some suggestions:
- Find pictures of property on mobile phones/computers prior to the damage
- Visit websites that can help estimate the fair market value of the lost items
- Obtain receipts, canceled checks, or other evidence to support the valuation
For vehicles, use one of the following resources to help determine the current fair market value:
- Kelley Blue Book
- National Automobile Association
- Reporting a Casualty Loss on Your Tax Return
Filing your taxes correctly after a property or casualty loss is critical. A casualty is defined as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Business property and income-producing personal property that are damaged or destroyed may be eligible for a casualty loss deduction.
Generally, casualty losses are deductible in the year the casualty occurred. However, under a federally-declared disaster area, taxpayers can choose to deduct the loss in the preceding tax year if desired. If a tax return for the preceding year was already filed, an Amended Income Tax Return (Form 1040X) may be filed.
The federally-declared disasters in 2022 are listed here: Tax Relief in Disaster Situations | Internal Revenue Service (irs.gov).
It is possible that the casualty deduction could cause a taxpayer’s deductions to be greater than their income resulting in a net operating loss (NOL). See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts for more information.
To figure the casualty loss, taxpayers will need to reconstruct their records (as discussed above) to determine the amount of the loss. Taxpayers may deduct the smaller of the following, less any insurance or other reimbursements received:
- Decrease in fair market value of the property as a result of the casualty
- Adjusted basis of the property—original price paid for the property, increased or decreased for certain items
Decrease in Fair Market Value
The decrease in fair market value used to figure the casualty loss would be the difference between the fair market value immediately before and after the casualty event. Typically, this is determined by obtaining an appraisal of the property. If an appraisal is not completed, clean-up costs and repairs are generally accepted as proof of the decrease in fair market value if they are:
- Actually made
- Not excessive
- Necessary to bring the property back to its pre-casualty condition
- Made to repair damage
- Not adding value or making it worth more than before the casualty
The adjusted basis of the property is typically the acquisition cost of the property, plus the cost of any capital improvements made. These figures can be determined using your real estate sales contract and finalized invoices from contractors and other professionals you used to improve the property.
Experiencing property loss can, unfortunately, happen to anyone. When it does, be prepared with these insights. If you’re concerned about casualty and your taxes, contact us today for expert assistance.
Meagan Weber, CPA, MBT
Meagan Weber is a director and leads the personal tax service area. She specializes in high net worth individual tax compliance and planning, gift and trust compliance and planning, and wealth transfer planning. Meagan has provided public accounting services since 2008 and has been at Redpath and Company since 2014.
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