Disaster Loss

A disaster loss is a special type of tax-deductible loss, similar to a casualty loss, where a loss has been incurred by taxpayers who reside in an area in the U.S. that has been designated as a federal disaster area by the president. Disaster losses can arise from such phenomena as floods, forest fires and earthquakes.

Disaster losses may be deducted either in the year that the loss is incurred or the previous year if it is more beneficial to the taxpayer and pending on the type of disaster. A tax professional is best-suited to distinguish which year is most beneficial for the taxpayer. Many people will take the deduction on the previous year because it provides them with an immediate refund on sudden losses. Homeowners who must relocate due to damage in a disaster area can often claim a loss even though the damage sustained does not meet the sudden event test. Disaster loss rules are the same for renters and commercial property owners as they are for homeowners.

Homeowners can deduct losses related to the home, household items and vehicles; however, they cannot deduct losses covered by insurance. If the homeowner files an insurance claim right away, they can subtract the loss from the amount of reimbursement and deduct the remainder. The homeowner would take the adjusted basis of the property (or the decrease in the fair market value of the property because of the disaster) and subtract the insurance reimbursement. For example, if the adjusted basis of a property was $100,000 and the insurance reimbursement was $80,000, the tax deduction would be $20,000.

A federally declared disaster area is eligible for federal assistance once it is declared a disaster by the president. This is stated under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, which was signed into law in 1988, and authorizes the federal government to provide various means of assistance to states and localities in the case of a declared disaster. The Federal Emergency Management Agency keeps a list of presidentially declared disaster areas.

A qualified disaster loss is similar to a casualty loss but may provide more favorable tax deductions. Not every federally declared disaster is known as a qualified declared disaster. Examples of declared disasters that were qualified for the 2016-2017 tax years were Hurricane Harvey, Hurricane Irma and the California wildfires. Those qualified disasters had special tax relief options.