Casualty Loss Rules—Hurricane Sandy Victims

Victims of Hurricane Sandy may be able to claim a deduction for Damaged and Destroyed Property.
The rules below describe the requirements to be able to claim this loss.

1. The claim is allowed as an itemized deduction for personal casualty losses provided that they are not reimbursed by insurance. The loss must first be reduced by $100 and then by 10% of your adjusted gross income. Any loss remaining after these reductions, you can claim an itemized write‐off on Schedule A of Form 1040.
2.  If you do not itemize, you cannot take this loss. Special Rules for Federally Declared Disaster Area
3. If the above applies and the loss occurred in a federally declared disaster area, a special rule allows you to claim your allowable write‐off in the year before the year the loss actually occurred and get a tax refund.
4. For example, Hurricane Sandy victims can choose to deduct their allowable losses in 2011; even though, the damage happened in 2012. This rule allows you to quickly receive some tax‐savings relief immediately instead of having to wait to file your 2012 return. Or if you itemized in 2011 and do not plan to itemize in 2012. If you wish to take advantage of this, you must file an amended 2011 return to claim your loss in that year.
5. You must make the choice to take the write‐off in the earlier year by no later than the filing deadline (without extensions) of this year’s return. For example, victims of Hurricanes Sandy have until April 15, 2013 to decide. Possible Unexpected Taxable Gain – Involuntary Conversion Gains
6.  If you have insurance coverage that covers the loss, you actually might have a taxable gain instead of a deductible loss. When the insurance proceeds exceed the basis (cost with adjustments) of a damaged or destroyed property, you have a taxable profit under the tax code. This is the case even when the insurance doesn’t compensate you for the full fair market value of the damaged or destroyed property prior to Sandy. For example, if you had coverage of $400,000 on your house which you purchased 15 years ago for $350,000, but the house today is valued at $475,000, then there would be a taxable gain of $50,000.00.
7. The above transaction must then be reported on your tax return unless : (1) sufficient monies are spent to repair or replace the property or (2) by making an election to defer the gain and purchasing qualifying replacement property within the allowed time period. Once the election is made, the taxable gain is only to the extent the insurance proceeds exceeds what is spent to replace the affected property. If in the above example, the house is rebuilt for a cost of $375,000, the gain would only be 25, 000.