Reporting Losses from Hurricane Ian on Your Taxes

By Attorney Ben Rydecki

As Florida continues to dig out from Hurricane Ian, we at O’Leary-Guth Law Office, S.C. wish those affected a speedy recovery.  As a result of the storm, President Biden officially approved a disaster declaration in Florida and made federal funding available for individuals various southwestern Florida counties.^[1]   As a result of this declaration, there is an opportunity for taxpayers to claim special deductions on their federal income tax returns for certain casualty losses incurred as a result of the storm.

What are casualty losses?

Casualty losses are losses that result from the damage, destruction, or total loss of property as the result of a sudden, unexpected, or unusual event such as a hurricane.^[2]  There are three different types of casualty losses^[3], all stemming from a Presidential disaster declaration:

• Federal Casualty Loss – must occur in a state receiving a federal disaster declaration
• Disaster Loss – must occur in a state receiving a federal disaster declaration and, more specifically, in an area eligible for assistance pursuant to the Presidential declaration
• The Florida counties eligible for federal assistance are Charlotte, Collier, DeSoto, Hardee, Hillsborough, Lee, Manatee, Pinellas, and Sarasota.
• Qualified Disaster Loss – a casualty loss resulting from several specific disasters. While Hurricane Ian is currently ineligible for qualified disaster loss treatment, this may change in the coming years, which may be impactful as explained later.  Previous hurricanes such as Harvey, Irma, and Maria, along with the California wildfires are all currently listed as Qualified disaster loss incidents.

Which losses are deductible?

Provided that your losses fall into one of the first two categories above, any losses from personal-use property that you incur and that exceed 10% of your adjusted gross income (AGI) are deductible as long as you itemize your deductions on your tax return.  Casualty losses are reduced by $100 per casualty.  Property used or held for business or investment purposes is subject to different rules that are beyond the scope of this article.

Losses that are NOT deductible include general wear-and-tear; money or property that is misplaced or lost; progressive damage (i.e., that which happens over long periods of time, such as termite damage); and breakage of China, glassware, furniture, or similar items.

What if I am getting reimbursed by my insurance company?

Reimbursement from insurance reduces the amount of loss you are eligible to claim as a deduction on your personal income tax return.  In fact, if your reimbursement exceeds the basis of the property it is meant to cover, you must recognize a gain.  However, you may be able to postpone some or all of this gain if you purchase replacement property that is similar or related in service or use to the damaged or destroyed property.  If the cost of the replacement property is equal to or more than the reimbursement you received, you may postpone the gain. 

If you specifically receive replacement property as reimbursement, you are not required to report gain.  The basis of the new property is the same as the basis of the old property.

When can I deduct my casualty losses?

Casualty losses are usually deductible in the year of the casualty, which is the year the federally declared disaster takes place (2022 for Hurricane Ian).  If you know with reasonable certainty whether the casualty loss will be reimbursable, you can deduct the loss in the year of the casualty.  If you do not know with reasonable certainty whether the loss will be reimbursable, you must wait until the tax year you know with reasonably certainty whether the loss will be reimbursable before claiming the loss.  Additionally, you may elect for disaster losses (see definition above) to be deducted in the tax year before the disaster year.

If your deduction exceeds your income for the year, you can file an amended return for the year proceeding the loss and claim the loss there.  You may also carry forward unused losses for 20 years, or until used up.

Special Rules for Qualified Disaster Losses

As mentioned above, qualified disaster losses are only available to taxpayers who have incurred losses resulting from specific events.  Hurricane Ian is not on this list yet, though it may be added later.  Qualified disaster losses are neither subject to the 10% AGI cap referenced above nor are they only deductible when itemizing deductions.  Qualified disaster losses increase your standard deduction by the total of all casualty losses, minus $500 per casualty. 

Special Rules for Homes in Disaster Areas

If your main home (i.e., the home you live in for the majority of the year) is located in one of the counties referenced above under “Disaster Losses,” you are subject to slightly different rules as it relates to realizing gain on insurance reimbursements.  If you own any unscheduled personal property (that is, property not specifically listed on your insurance) that is covered under a general personal property insurance plan, you are not required to recognize any gain on an insurance reimbursement that exceeds the value of the unscheduled personal property.  

Any other insurance proceeds you receive for your home or its contents are treated as though received for a single item of property.

What should I do to make sure I can claim these losses?

First, keep a detailed inventory of all the items that were damaged or destroyed by Hurricane Ian.  Next, track down all previous documents or receipts of the property that was damaged or destroyed, including receipts for improvements to property.  The higher your basis, the larger the losses you can claim, and the less likely it is that you will recognize a gain from insurance proceeds.  Finally, to the extent your property is insured, file insurance claims and keep record of the proceeds you receive as reimbursements.

Conclusion

Though this is a lot of detailed information, in sum, keep track of the losses your incurred from Hurricane Ian as they may save you some money on your tax returns.  Please stay safe and healthy as you recover from this tragedy, and if you need any assistance on your tax planning or preparation, please contact O’Leary-Guth Law Office.

^[1] President Joseph R. Biden, Jr. Approves Florida Disaster Declaration

^[2] IRS Topic No. 515 Casualty, Disaster, and Theft Losses

^[3] Instructions for Form 4684 (2021)