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mark-mcgraw
New Member

I was effected by the Federal declared Ice storm in Texas in Feb. I am new at this one. I’m trying to understand the correct figures to put in.

I was thinking the FMV would be the price on my city tax appraised value?  And the FMV after would be the value of  all damages excluding deduductible from insurance?
3 Replies
mark-mcgraw
New Member

I was effected by the Federal declared Ice storm in Texas in Feb. I am new at this one. I’m trying to understand the correct figures to put in.

So my figures are 

purchase price of house:   $820,000

State appraised value:        $910000

Total Damage to house and belongings:      $320,000

Insurance paid:                                                   $300,000

Within the $320,000 was furniture damage of. $100,000 (insurance paid)

Opus 17
Level 15

I was effected by the Federal declared Ice storm in Texas in Feb. I am new at this one. I’m trying to understand the correct figures to put in.

For practical purposes, you probably don’t have anything to deduct, and may in fact have a taxable gain.  

The tax law surrounding casualty losses is a bit tricky. Your loss is not technically your cost to repair, your loss is technically the loss in fair market value of the property due to the storm damage. This would require a real estate appraisal before and after the storm. The tax value is probably not the true market value, it is rarely true market value in most jurisdictions.

 

Without getting a before and after appraisal, the IRS allows you to use your repair cost as an estimate of the loss of fair market value, if the repairs merely restore the property to its as-was condition. Meaning, you replaced the drywall, carpeting, roof, etc. with materials of similar quality and construction.


The next issue is that the real property, which means land and any permanently attached structures, and personal property, must be handled separately.

 

Let’s first consider the personal property, for which you received a settlement of $100,000. If this represented replacement value because you had a replacement cost coverage, then you probably have a taxable gain. Your cost basis in the personal property is what you originally paid for the furniture, clothing, electronics, and other items.  Your proof of this is probably long gone. Let’s assume that a fair estimate for the original purchase price was $50,000.  In that case, you have a taxable gain of $50,000. It would be treated the same as if you sold your property to the insurance company for more than you paid for it, just like selling stocks or investments for more than you paid. This would be a taxable gain reported on schedule D and would be a long or short term capital gain depending on how long you owned the personal property items before they were damaged and replaced.  (On the other hand, if you had a fair market value insurance policy, you may have been paid the value of the items in as-used condition, which is probably less than what you originally paid for the items. In that case, the settlement is not taxable.)

 

Now let’s consider your real property. It seems that your loss was $220,000, and insurance paid $200,000.  As long as you meet the conditions I described in the beginning, you can treat the repair cost as a fair estimate of the loss of fair market value.  In that case, you could enter $910,000 as the original fair market value, and $690,000 as the fair market value after the loss.  (It doesn’t matter if $910,000 is exactly the real fair market value of the home in your neighborhood at the time of the storm because the purpose of this calculation is to make the loss equal to $220,000, again, based on the IRS position that your repair cost is a fair estimate of the loss of value if you restored the property to as-was condition.). 

This calculation will give you a net $20,000 loss on your real property, which would be a deductible casualty loss. However, because you can only deduct losses after a $500 deductible and a separate deductible equal to 10% of your adjusted gross income, you won’t actually get any benefit from listing the loss on your tax return unless your adjusted gross income is less than $200,000.

 

So you may in fact have a taxable gain on your contents and no deductible loss on the real property.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Opus 17
Level 15

I was effected by the Federal declared Ice storm in Texas in Feb. I am new at this one. I’m trying to understand the correct figures to put in.

For more information, see this IRS publication and in particular, review the section on the Safe Harbor for federally declared disasters and IRS revenue procedure 2018-08.


https://www.irs.gov/publications/p547#en_US_2020_publink1000225228

 

Briefly, if you are in a federally declared disaster area, you can use the price that you paid the contractor to restore your house as the estimate of your loss in value, as long as the home was restored to its previous condition and did not increase in value as a result of the repairs.


Regarding your personal belongings, revenue procedure 2018-08 provides a method for calculating the adjusted cost basis of each item, comparing that to the reimbursement, and determining whether you have a deductible loss or capital gain on the item.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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