Casualty, Theft & Disaster Losses

There are two types of losses individuals and businesses sustain that will give them tax relief.

Casualty & Theft Losses

  1. Casualty results in a deductible loss only if property is physically destroyed or damaged from an event that is sudden, unexpected or CPA, Consulting, Payroll, Bookkeeping, Internal Controls, Houston, TX, The Woodlands, TXunusual such as a fire, storm, earthquake, hurricane, auto accidents.
    1. Many expenses incurred with casualty losses are not deductible such as, monetary judgements or settlements, temp living arrangements, casualty insurance premiums, cost of appraisals.
    2. But the cost of cleanup or removal of debris and cost to recover lost property is deductible as part of casualty loss.
    3. Taxpayers must also prove a theft occurred under state law.
  2. Casualty loss in generally sustained in the year the casualty occurred.

Disaster Losses

  1. Disaster Loss is the loss of property that results from the occurrence of a disaster area designated by the President of the United States
  2. Disaster losses qualifies for special tax treatment
  3. Taxpayer may elect to deduct disaster loss in the tax year in which the disaster occurs or in the tax year immediately preceding the tax year in which the disaster occurs.
  4. Loss on personal property qualifies for deduction as a disaster loss only if it also qualifies as a casualty loss
  5. Loss of Property used in a trade or business qualifies as a disaster loss even though the loss is not deductible as a casualty loss.

Disaster loss may be deducted in the year of occurrence or, at the taxpayer’s election, in the immediately preceding tax year. Residences that are ordered demolished or relocated as result of disaster may qualify as disaster-area casualty losses.

CPA, Consulting, Payroll, Bookkeeping, Internal Controls, Houston, TX, The Woodlands, TXA taxpayer may elect to deduct a disaster loss in the year of occurrence or the immediately preceding year. To qualify for the election, the loss must occur in a declared disaster area and qualify as a deductible casualty loss.  The election is made on a return, an amended return or a refund claim. Residences located in a disaster area that are rendered unsafe by the disaster and are ordered to be demolished or relocated may qualify as disaster area casualty losses.

Demolition or Relocation of Residence

Ordinarily, no deduction for a loss on the sale of residential property is allowed, although a casualty loss deduction is available for damage to a house.  However, the demolition or relocation of a personal residence can be claimed as a casualty, regardless of whether a casualty occurred to the residence, under the following circumstances:

(1) the area in which the residence is located is declared a disaster area by the President under the Disaster Relief Act of 1974;
(2) the residence is rendered unsafe by the disaster; and
(3) within 120 days after the area is declared a disaster area, the state or local government where the residence is located orders the demolition or relocation of the residence.

A loss that meets the three conditions listed above is treated as a disaster loss and, therefore, a deduction may be taken either in the year the order to demolish or relocate was given, or the immediately preceding year.