Understanding Tax Relief - PowerPoint Presentation

1. Understanding Tax Relief for DisastersMedia: CL.SL.Web.Conference.Team@IRS.gov Communications & Liaison Division1

2. PresenterJoseph McCarthy CPAIRS Stakeholder Liaison 2

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8. Casualty DefinedA casualty is the damage, destruction, or loss of property resulting from an identifiable event that is:SuddenUnexpectedUnusual Rev. Rul. 72-592, 1972-2 C.B. 1018

9. Casualty Defined (cont’d)A sudden event is one that is swift, not gradual or progressive.An unexpected event is one that is ordinarily unanticipated and unintended.An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. Rev. Rul. 72-592, 1972-2 C.B. 1019

10. Computing Casualty LossesA casualty loss is the lesser of:Decrease in fair market value (FMV) as a result of casualty and theAdjusted basis before casualty Subtract any insurance or other reimbursement received from the smaller of (1) or (2) above Tres Reg § 1.165-7(b)10

11. Methods of valuationThe fair market value of the property immediately before and immediately after the casualty shall generally be ascertained by competent appraisal.The cost of repairs to the property damaged is acceptable as evidence of the loss of value the repairs are necessary to restore the property to its condition immediately before the casualty the amount spent for such repairs is not excessive Tres Reg 1.165-7(a)(2)11

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16. Casualty Loss LimitationsLosses of personal-use property are calculated on Section A of Form 4684 and are subject to:$100 per-loss limit10 percent-of-AGI limitDisaster related casualty losses are deductible only if you itemize deductions. IRC 165(h)16

17. Computing Casualty Loss: Example$144,800 Adjusted basis of property$180,000 FMV of property before disaster $35,000 FMV of property after disaster$145,000 Decrease in FMV of property $144,800 Loss (Lesser of FMV or adjusted basis)17

18. Computing Casualty Loss: Example (Continued)$144,800 Loss (Lesser of FMV or adjusted basis)$130,000 Less insurance reimbursement $14,800 Loss after insurance reimbursement $100 Less $100 per loss rule $14,700 Loss after $100 rule $8,000 Less 10% of $80,000 AGI $ 6,700 Casualty loss deduction 18

19. Casualties - Adjustments to BasisCasualties - Adjustments to BasisDecrease basis in property by any insurance/other reimbursement, &any deductible lossIncrease basis in property byAmount you spend on repairs that prolong life of property, increase value, or adapt it to different use19

20. Safe Harbors for Determining Decrease in Fair Market ValuePersonal use residential real property Estimated repair cost method.De minimis method.Insurance method.Contractor safe harbor.Disaster loan appraisal. Revenue Procedure 2018-0820

21. Computing Casualty LossesA casualty loss is the lesser of:Decrease in fair market value (FMV) as a result of casualty Adjusted basis before casualty Subtract any insurance or other reimbursement received from the smaller of (1) or (2) above. Tres Reg § 1.165-7(b)21

22. Safe Harbors for Determining Decrease in Fair Market ValueEstimated repair cost methodUse the lesser of two repair estimatesThe estimates must detail the itemized costs to restore your property to its condition immediately before the casualtyLimited to casualty losses of $20,000 or lessFor personal use residential real property only. Revenue Procedure 2018-0822

23. Safe Harbors for Determining Decrease in Fair Market ValueDe minimis methodRequires a written good-faith estimate of the cost of repairs required to restore your property to its condition immediately before the casualtyAvailable for casualty losses of $5,000 or lessFor personal use residential real property only. Revenue Procedure 2018-0823

24. Safe Harbors for Determining Decrease in Fair Market ValueInsurance methodIs based upon the estimated loss in reports prepared by your homeowners' or flood insurance companyThese reports must set forth the estimated loss you sustained from the damage to or the destruction of your propertyFor personal use residential real property only. Revenue Procedure 2018-0824

25. Safe Harbors for Determining Decrease in Fair Market ValueContractor safe harborUse the contract price for the repairs specified in a contract prepared by an independent and licensed contractor to determine the decrease in the FMV Requires a binding contract signed by the taxpayer and the contractor setting forth the itemized costs to restore the property For personal use residential real property only. Revenue Procedure 2018-0825

26. Safe Harbors for Determining Decrease in Fair Market ValueDisaster loan appraisalRequires an appraisal prepared to obtain a loan of federal funds or a loan guarantee from the federal government that identifies your estimated lossFor personal use residential real property only. Revenue Procedure 2018-0826

27. Safe Harbors for Determining Decrease in Fair Market ValuePersonal belongingsDe minimis method - a good-faith estimate of the decrease in the FMV of your personal belongings. Limited to losses of $5,000 or lessReplacement cost method - current replacement cost of the property reduced by 10% for each year you have owned the property Revenue Procedure 2018-0827

28. Election To Claim Disaster Losses On a Prior Year Tax ReturnTaxpayers may elect to deduct a casualty loss that occurred in the current tax year on their preceding year tax return if the casualty loss occurred in a federally declared disaster area determined to warrant federal assistance. IRC 165(i)(1) & Rev Proc 2016-5328

29. Election To Claim Disaster Losses On a Prior Year Tax ReturnHow to deduct a loss in the preceding year. Include statement either on the original return or the amended return with the following information:Disaster name (or description)Date(s) of the disasterCity or town, county, state and zip in which the damaged/destroyed property was located Rev Proc 2016-5329

30. Election To Claim Disaster Losses On a Prior Year Tax ReturnThe election to claim disaster losses on a preceding year tax return can be made up to six months after the due date of the taxpayer’s federal income tax return for the disaster year (without regard to any extension of time to file.)Effective for tax returns filed after October 13, 2016. Rev Proc 2016-5330

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32. Resourceswww.IRS.gov/disaster IRS Publication 547, Casualties, Disasters, and TheftsIRS Publication 584, Casualty, Disaster and Theft Loss WorkbookIRS Publication 2194, Disaster Resource GuideForm 4684, Casualties and Thefts32

33. Resourceswww.irs.gov/pub/irs-pdf/p3067ede.pdfDisaster Hotline Number: 866-562-5227Local IRS Taxpayer Assistance CenterRevenue Procedure 2018-8IRC 165(i)(1) & Rev Proc 2016-5333

34. Thank You!34