Disaster loss - what about my view lot?

[JoeK]

Our home was completely destroyed in the 2018 Camp Fire - FEMA Disaster Area.  Almost half the value of our home was our incredible view lot.  That view is now completely black, scorched forest as far as the eye can see (3-5 miles) and won't come back for decades.  Can we claim a "damaged property" deduction even if we don't sell it?  Alternatively, can we claim a loss if we do sell it in 2019?  I would guess the lot is worth 10% of it's value on November 7th, and maybe 20% of our 2003 basis.

[NCperson]

You can take a casualty loss on the building because your are in a declared disaster area (otherwise under the new tax law , it would not be deductible)

If you sell the property at a loss, there is no deduction possible because it’s a personal loss

[JoeK]

The building was fully insured.  It's the loss of value in the lot that I'm asking about.  I suffered a financial loss in the form of destruction of the value of my lot, which was based on a view that no longer exists.  If I experience an uninsured disaster loss, seems like tax law would accommodate something that wasn't a market change, but rather a direct result of a federally-defined disaster.   I lost value to an act of God (with help from PG&E), not a bad economic decision.  It's an odd situation; if my house had burned down on it's own, the lot value would not have been significantly affected because the view value would have remained.

[NCperson · Accepted solution]

please review this FAQ from the IRS. So as long as you were in a federally declared disaster, it appears you are eligible for the casualty loss, given the limitations below.   There is nothing I found that separates 'view' from the value.  

But note the loss is limited by the cost basis, i.e. let's say you bought the land and house for $100,000; the day before the disaster, the land + house was worth $1,000,000 with the home insured for $250,000.  Now it's only worth $200,000 after the insurance proceeds for the loss of the structure.  The casualty loss would be zero because the cost basis was $100,000 and the insurance proceeds of $250,000 reduced the cost basis to zero. 

so what they IRS is saying is that while it will cover your original investment loss, it will not cover the appreciation that occurred since the purchase that is now lost.  

take the 2003 purchase price and add in any improvements you made subsequent to that date and then subtract the insurance proceeds.  Then calculate the change in value from the day before to the day after the fire (net of the insurance proceeds.)  The lower of the two is the limit of your casualty loss.  

https://www.irs.gov/businesses/small-businesses-self-employed/faqs-for-disaster-victims-casualty-los...

(6/1/07) Q: Section 1.165-7(b)(1)(i) indicates the decrease in fair market value is the difference between the property’s value immediately before and immediately after the casualty. What constitutes “immediately after”?

A: To compute the deductible casualty loss, taxpayers need to determine: (1) the difference between the fair market value immediately before and immediately after the casualty; and (2) the adjusted basis of the property (usually the cost of the property and improvements). Taxpayers may deduct the smaller of these two amounts minus insurance or any other form of compensation received or expected to be received. One method of determining the decrease in fair market value is an appraisal. An appraisal must reflect only the physical damage to the property and not a general decline in the property’s fair market value. See § 1.165-7(a)(2)(i) of the Income Tax Regulations. Taxpayers may also use the cost to repair or clean up the property (cost-of-repairs method) to determine the decrease in fair market value caused by the casualty. See § 1.165-7(a)(2)(ii).

here is a link to the federally declared disaster areas, so your's must be listed here to qualify for a casualty loss:

https://www.fema.gov/disasters/year/2018

ps sorry you had to go through this headache.

[JoeK]

Great guidance, thanks.  Looks like there's not much I can do as my original cost basis from 2003 is less than the insurance proceeds received for the structure.