Prior to Hurricane Ian making landfall, President Biden issued a federal emergency declaration for the State of Florida. A federally declared disaster is a prerequisite to the deductibility of a casualty loss, and the declaration served to unlock deductibility of losses resulting from the storm.
Affected taxpayers have the option of claiming disaster-related casualty losses on their federal income tax returns for either 2022 or 2021. If you need a tax refund to restore or replace your property, you may be able to get cash faster by claiming the casualty loss on an amended 2021 return rather than waiting for the 2022 filing season. The IRS expedites processing of amended returns notated with the appropriate disaster information; the refund is issued generally within 60 days.
Casualty losses are claimed on Form 4864, “Casualties and Thefts.” Affected taxpayers claiming the disaster loss should put the disaster designation "FL Hurricane Ian" in bold letters at the top of the form and include the FEMA disaster declaration number “DR-4673-FL.” If you opt to claim the loss in 2021, you must file Form 1040-X “Amended U.S. Individual Income Tax Return” if you have already filed your original 2021 return.
Measuring your loss
It can be challenging to measure your loss. The IRS defines the amount of the loss as the lesser of (1) your adjusted basis in the destroyed property, and (2), the decline in fair market value from before to after the casualty:
Once the loss is measured, any insurance or other reimbursement you received, or that you expect to receive, must be subtracted from the otherwise deductible amount. Food, medical supplies, and other forms of assistance you received do not reduce your casualty loss, unless they are replacement for lost or destroyed property.
If you receive a reimbursement greater than your adjusted basis in the destroyed property, you might have a tax gain. You may have options to mitigate the tax liability associated with the gain, so it is important to seek tax advice as soon as practicable.
Casualty losses are typically subject to a per-casualty limitation as well as a limitation based on your adjusted gross income. The limits have been waived in the past for other declared disasters, but we are still waiting for guidance regarding how these limitations will apply to Hurricane Ian. We will provide updates as they become available.
If you have a casualty gain or loss resulting from Hurricane Ian, and need help filing the appropriate forms or determining your gain or loss, please consult an HBK Tax Advisor.