Permitted by DEP - Rip Rap

[0816]

My property was hit hard due to a flood.  DEP approved and permitted a Rip Rap project.  I was told that there is a deduction for this since FEMA nor any government agency helped fund it.  Can this be considered under the 'Losses' deduction?

[Opus 17]

Did you actually pay to do something? What was it?

[0816]

We followed DEP permit requirements.  We hired a company that is experienced with this type of work.  We had many tons of rip rap placed as noted by the permit.  Total job cost for us was $189,000.  

[Opus 17]

Any improvements you pay for that you make to real propery—that is to say, land you own and anything that is permanently attached to or part of the land—adds to your cost basis. It is not a tax deduction when you make the improvement, but it may reduce your capital gains when you sell.

there might be additional state tax benefits for environmental improvements to your land, but there are no special federal tax deductions or credits. You would have to review the state program module carefully, or ask a local tax preparation expert for advice on your state tax policy.  Note that if you do receive a deduction or credit at the state level, you have to treat that as a reduction in the cost basis adjustment when figuring the capital gains calculation.

[0816]

Yes, we had 4000 ton of rip rap postioned along the creek bed costing $189,000.

[RobertG]

When you have items that are lost or damaged as a direct result of a natural disaster, and you live in a federally declared disaster area , you may be able to take a casualty loss deduction for the value of the property that is not covered by your insurance.

The lost or damaged items can be personal property, business property or investment property.

In TurboTax, jump to the entry area for casualty loss:

1. Open your return. (To do this, sign in to TurboTax and open or continue your return.)
2. Search for casualty loss and then click the Jump to link in the search results.
3. On the Did you have anything damaged or stolen in 2019? screen, select Yes.
4. Answer the interview questions describing your event.

[Opus 17]

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@RobertG wrote:

When you have items that are lost or damaged as a direct result of a natural disaster, and you live in a federally declared disaster area , you may be able to take a casualty loss deduction for the value of the property that is not covered by your insurance.

The problem here (beside the fact that the taxpayer just said flood and we don't know if it was a declared federal disaster or not) is that the cost for the rip-rap is not necessarily the amount of the loss.

The amount of the loss is the decrease in fair market value due to the disaster.  In simple cases, where property is repaired to its original state, the IRS allows the cost of repairs to stand in for the amount of lost value.  But if the repairs or improvements make the property better than it was before the event, then the cost of the improvement can't be used as an estimate of the loss of fair market value.  An appraisal may be needed, which may be difficult or require an adjuster experienced with this kind of situation.  

For example, if your home or farm is on a flood plain, and the flooding washes away the existing natural levee, making your home more exposed to future flooding, how much does that actually decrease the price you would get if you put the home or farm on the market?  That's the amount of loss you can claim if the flooding was part of a federally declared disaster.  

Then of course, there is the 10% limit on casualty loss deductions to overcome, and if you do deduct a loss, that subtracts from your cost basis just as making improvements adds to the basis.

[0816]

The area was declared a disaster area by the Federal government.

So I should claim as a casualty loss then?

[MaryK4]

Yes, if this was a federally declared disaster area you can claim the loss for the loss up to the decrease in value.

@0816