Q: Tax Playa, if my house were to burn down, would I be able to get any kind of tax advantage?
Adam, Arlington VA
A: Taxpayers are allowed a deduction for casualty and theft losses. However, this is subject to quite a few limits, and is unavailable to all but a few taxpayers...
For more information on this topic, please consult IRS Publication 547, "Casualties, Disasters, and Thefts."
A casualty is defined as a loss to your property that is sudden (as opposed to gradual), unexpected (as opposed to something that could be reasonably-anticipated), and unusual (as opposed to something that is a day to day occurrence).
A theft is defined as taking or removing money or property with the intent of depriving the owner of it.
The amount of loss is determined by subtracting the fair market value after the loss from the fair market value immediately-before the loss.
This is separate and distinct from figuring your adjusted basis in the property, which must take into account original cost, depreciation, improvements, etc. If the amount you receive from insurance reimbursements exceeds your adjusted basis, you have a gain. Even here, you have two years to replace your property with substantially-equal property to postpone any gain.
These losses are deductible, but there are many thresholds to meet before any deduction can be realized:
- Only losses above and beyond what was reimbursed by insurance is deductible
- Of what remains, $100 per loss item must be reduced from the total
- Of what remains, 10% of AGI must be subtracted from it
- If anything is left, this deduction is only available to itemizers. Even here, it is disallowed for those falling under AMT
As a result, this deduction is not as lucrative as it might sound. There is one class of taxpayer, though, for whom it can be quite lucrative: under-insured persons in presidentially-declared disaster areas.
Under a special rule, if your loss occurred in a presidentially-designated disaster area, you have the choice of taking the casualty and theft loss either in the year of the loss, or in the immediately-prior year. The advantage to the second choice is that you can amend your return and get money immediately. The choice is up to the taxpayer.