18.2 When To Deduct a Casualty Loss

Generally, you deduct a casualty loss in the year the casualty occurs, regardless of when you repair or replace the damaged or destroyed property. However, a deduction is allowed in the year you pay to repair corrosive drywall damage to your home or household appliances under a special IRS procedure (18.1). For a qualifying disaster area loss (18.3), you have the option of claiming the loss on your return for the year immediately preceding the year in which the disaster occurred.

If a casualty occurs in one year and you do not discover the damage until a later year, or you know damage has been inflicted, but you do not know the full extent of the loss because you expect reimbursement in a later year, here is what to do:

Caution

Do You Expect to be Reimbursed?

If you think you might be reimbursed for part of your casualty loss in a later year but are not sure, the IRS says to delay taking the deduction for that part until the year you become reasonable certain that it will not be reimbursed.

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If you reasonably expect reimbursement in a later year.

For the year the casualty occurred, you should deduct only that part of your loss, after applying the personal property floors (18.12) for which you do not expect reimbursement. For example, if you expect a full insurance recovery in 2013 for a 2012 loss, you would take no deduction on your 2012 return.

If you do not expect any reimbursement and deduct a loss on your 2012 return, but you receive insurance or other reimbursement in 2013, the reimbursement is taxable in 2013 to the extent that the 2012 deduction gave you a tax benefit by reducing your 2012 taxable income (11.6). You may not amend your 2012 tax return.

You must file a timely insurance claim if your property is covered by insurance. Otherwise, the amount covered by the insurance cannot be taken into account when figuring your deductible casualty loss; see 18.13 and 18.16.

If your reimbursement is less or more than you expected.

Assume a 2011 storm damaged your home and you did not claim a loss deduction on your 2011 return because you expected to recover your entire loss in 2012—but the insurance company refuses to pay your claim. When do you deduct your loss? You deduct your loss in the year you find that you have no reasonable prospect of recovery. For example, you sue the insurance company in 2012, with a reasonable prospect of winning your claim. However, in 2013, a court rules against you. You deduct your loss on your 2013 return, subject to the personal property floors (18.12) . If you, as lessee, are liable to the lessor for damage to property, you may deduct the loss in the year you pay the lessor.

If you claim a loss and in a later year receive a larger reimbursement than you expected when you figured your deduction, you have to include the reimbursement in income for the year you receive it to the extent the deduction gave you a tax benefit (11.6). For example, if you claimed a loss on your 2011 return and in 2012 you receive a larger insurance reimbursement than expected, you must include the recovery as 2012 income to the extent the deduction reduced your 2011 taxable income (11.6).

If you do not discover the loss until a later year.

In this case, IRS regulations do not specifically allow a deduction for the loss in the year it is discovered, but court decisions have. In one case, an unseasonable blizzard damaged a windbreak planted to protect a house, buildings, and livestock. The damage to the evergreens did not become apparent until the next year, when about half of the trees died and the others were of little value. The court held that the loss occurred in the later year. In another case, hurricane damage did not become apparent for two years. The Tax Court allowed the deduction in the later year. A deduction is generally not allowed for drought damage after the year in which the drought occurs (18.1).

If your loss is in a federal disaster area.

If your property is damaged in an area eligible for federal disaster assistance, you have a choice of years for which the loss may be claimed (18.3).

If reimbursements exceed your adjusted basis for the property.

Receiving reimbursements in excess of adjusted basis results in a gain that you must report on your return unless you acquire qualifying replacement property and elect to defer the gain (18.19). If a loss is claimed in one year and in a later year you receive reimbursements that exceed your adjusted basis, the gain is included in income for the later year to the extent the original deduction reduced your taxable income (11.6). The remainder of the gain is taxable unless you buy replacement property that enables you to defer the gain (18.19).

Filing Tip

Accelerating a Tax Refund With Disaster Loss

Disaster loss rules give you a chance to deduct a loss earlier than under general rules. This may result in a tax refund for the prior year. You may make an election to claim the loss for the prior year in a signed statement attached to an amended return for that year if the original return has already been filed. List the date of the disaster and where the property was located (city, town, county, and state). To amend a filed return for the prior year, use Form 1040X. Consider making the election if the deduction on the return of the prior year gives a greater tax reduction than if claimed on the return for the year in which the loss occurred, or if you need the refund for the prior year tax and do not want to wait until you file your return for the year of the disaster to claim the loss.

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