A casualty loss is the damage, destruction, or loss of property resulting from an uncontrollable event that is sudden or extraordinary. It can also be an order of the government to destroy or remove a structure for safety reasons because of a disaster. These losses are considered a valid casualty, whether it is personal or business property, if they are as a direct result of a particular event that is sudden, unpredicted or destructive. These events could be caused by fire, flood, earthquakes, theft or other similar events.
When accounting for an individual casualty or theft loss deduction, you must consider several conditions in order to qualify. Aside from selecting the itemize deduction option, you must establish proof of ownership and value of the items loss. To determine the validity of your casualty or theft loss and claim the deduction, you must complete the form for Casualties and Thefts. The completed form must be filed with your tax return.
Accounting
It is difficult to establish credibility for this deduction especially if you have no record of ownership and value of the property - a receipt of purchase or other documentation. For uninsured property or a gift, perhaps the proof to ownership and value can be established by the person who gave the gift. In the event of a theft, it makes sense to file a police report as documentation to establish your loss.
A casualty or theft loss, as a result of a car accident or vandalism, can be established as a valid loss deduction by using insurance and appraisal documentation. However, for insured property that is considered a loss, a claim must be filed with the insurer even if the value of the property is not expected to be recovered from the insurer.
If your loss was the result of an unanticipated, abrupt disaster, your records were probably destroyed by the devastation. You can reconstruct your records to determine ownership and the value of the property through records such as insurance and appraisal documents. Appraisal fees are not considered a loss, but accounting for these fees is permissible as a miscellaneous deduction.
An invalid casualty or theft loss is deliberate damage or destruction of property caused by the person seeking gain or reimbursement. An invalid loss can also be neglect, failing to make necessary repairs to property, or carelessness, such as failing to secure valuables by leaving keys in an unlock car.
Repairs are not normally a valid deduction, but the cost of repairing and cleaning up the property to bring it back to the condition before the disaster is a valid deduction. The cost of repairing damage (only) to leased property, such as a car, caused by a casualty disaster is also a valid deduction. To establish the condition of your property before a disaster, its smart to video tape your property in advance and keep the tape in a secure place away from the property.
The amount of your deduction usually does not equal your loss. Certain conditions and calculations are mandatory when accounting for this deduction that will reduce the amount of your claim. The reductions include insurance reimbursements and other adjustments that may affect your claim. IRS accounting practices require that you reduce each loss according to a three-step process. First, by the 0 floor amount, 10% of your AGI and the decrease in the property's fair market value as a result of the damage or original cost. This could eliminate your entire deduction if it is a small claim..
Accounting for a loss that occurred in a Presidential declared disaster area, gives you the choice of claiming your loss in the year it happened or in the previous year by amending your tax return for that year. Choosing the prior year will quickly make your refund available to you.
The receipt of a reimbursement that is not used to replace your property may be considered a taxable gain. To suspend the gain, you must replace the property with a comparable one and it must be at least the same value as your reimbursement. The replacement must be made within a two-year period, which starts the last day of the year the gain is realized. You must replace the property within four years of your reimbursement, or request a one-year extension, if your loss occurred in a Presidential declared disaster area, in order to avoid a taxable gain.
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