Claiming Disaster Losses and Deferring Casualty Gains

(00:00) [Music] welcome to the Cherry Bekaert tax beat a conversation about tax that [Music] matters welcome to this edition of the Cherry Bekaert tax beat podcast 2024 has been filled with natural disasters fires hurricanes tornadoes floods the IRS offers taxpayer return filing and payment relief in many counties across the US in conjunction with these disasters uh at this point more than 60 disaster relief notices have been issued so far this year um that's one form of relief and we'll briefly touch on that during this podcast uh the other point

(00:51) the other part of relief is um at is that the code and regulations offer some advantages to taxpayers whose property has has been damaged by a federally declared disaster and that's going to be the primary focus of this podcast joining in today's conversation is Mark geonardo partner in tax technical director for the firm Mark practices uh in our South Florida offices and has recent experience probably more than he cares to uh recall uh working with clients impacted by hurricanes so hello Mark how you doing today I'm well Brooks

(01:27) thank you for having me today it's a pleasure for me to be here um and just just for comparison how is the weather in sunny Florida today it's actually very nice very nice high 80s and and sunny and we expect you know afternoon showers like we do every day this time of here so it's all good it's all good but no but but no hurricanes tropical storms or tsunamis on the horizon for the week not that we're aware of all right yeah but but but you are in Florida in that can change at any time I guess can all right so let's just

(02:05) do a little background the first I'm going to touch on is um the uh relief for filing and in some cases payment of uh tax returns tax payments that the IRS offers for federal relief these tend to be very State and County specific uh we'll go in just a little bit more in detail on that at the end but again the main focus is is looking at uh casualty losses and deferrals of casualty gains all right so uh when these disasters occur obviously the first and foremost important goal safety health and well-being for families and communities

(02:45) as recoveries begin taxpayers uh start dealing with insurance claims loss deductions all sorts of economic issues that quickly lead to tax issues uh in the wake of many of these disasters that occurred in 2024 we want to um take a moment to discuss losses for damages to business property and personal property from a federally declared disaster uh the tcja or the tax cut and jobs act Provisions may impact both businesses and individuals taxpayers claiming losses uh we'll touch on that and finally we'll touch on the tax rule that

(03:20) is beneficial to those who may experience a casualty gain which is uh know uh not as uncommon as one may think uh when you look into the rules exactly how it casually gain and I think I'll just you know preface that by saying there's a big difference between an economic gain which is very rare in these situations versus a tax gain which is not so rare all right so you're up Mark first step is to understand how tcja impacts casually loss deductions thank you Brooks well first of all a casualty is the complete or partial destruction

(03:57) of property it results from an identifiable event of a sudden unexpected or unusual nature such as a fire storm shipwreck car crash or similar event Progressive deterioration from a steadily operating cause is not a casualty the property must suffer physical damage and not just a decline in value even if that decline resulted from being in or near an area where casualties have occurred and might occur again for 2018 through 2025 personal casually and theft losses of an individual are deductible only to the extent that they're attributable to

(04:35) a federally declared disaster and to the extent the $100 per casualty or 10% of AGI limits are met so let's come back to those limits in a minute but how is the amount of a loss determined well for property heeld for personal use the amount of the casually loss is a lesser of one the property's adjusted basis or two it's decline in value decline in value is simply the fair market value immediately before the casualty minus the fair market value immediately after the casualty for property used in a business or held for

(05:19) the production of income the amount of the casualty loss is determined under the same rules as for personal use property except that if the property is totally destroyed the amount of the loss is the property's adusted basis in all cases so really you're limited to your basis uh but that decline in value might be less than the Basis in the property if it's not totally destroyed but that uh you know determining fair market value before and after seems like a difficult um task how can a taxpayer determine that decline in value well the

(05:55) decline in property's value should really be ascertained by compet appraisal were possible however the cost of making repairs replacing or cleaning up property after a casual can be used to measure the amount of the loss or the decline in value um if the repair Etc is necessary to restore the property to its prec casualty condition and so long as the amount spent is not excessive the repairs do no more than take care of the damage suffered and the postrepair value is no greater than the pre casualty value so

(06:29) basically what you spend is a good indication of the decline in value and that's often how we we actually document the decline is looking at how much is actually spent to bring the property back to pre-c casualty conditions right so how does an insurance payment or maybe FEMA funding or uh all these other sources of funding that are coming in from donations um affect that LW that a taxpayer may be trying to claim well it's important to realize that a casually loss deduction is not allowed to the extent that the

(07:08) loss is compensated by insurance or otherwise so that would that would include you know insurance payments or FEMA payments or any other any other uh type of payment that you might receive all right so let's go back to uh what we're mentioned earlier uh these nasty uh limits yes the tcja limits that apply to individuals or potentially apply to individuals so can we go into those a little more in depth sure sure an individual can deduct the casualty loss on personal use property to the extent that the casualty loss exceeds

(07:47) $100 and all of the individual's casually losses for the tax year exceed 10% of adjusted gross income for the year that's pretty daunting for for taxpayers uh to to get over but I would guess um 10% of adjusted gross income depending upon what the property was that was damaged and uh how high their adjusted gross income is but those limits don't apply to business losses correct those limits those limits only apply to individuals claiming losses on schedule a itemized deductions for damages incurred in a federally declared

(08:24) Disaster Area businesses are not subject to these limitations um and prior your Congress has enacted legislation to wave these limits so we'll have to wait and see if that happens for uh for all of the hurricane damages that happened this year yes all right so as kind of a core corollary to the business losses on the individual return uh having more lenient uh losses uh what about true business entities how do uh these limitations apply to business returns right well if the loss is large enough to cause the company to actually

(09:05) have a net operating loss carry forward that nool is limited in future years and can only offset up to 80% of the taxable income in that future year so and in my mind I just I guess we need to uh get to Clarity that makes really uh I mean obvious Sense on a C corporation uh what what about in a entity kind of uh a pass through entity context do the do individuals with pass through entities get any um benefit from that same provision well they do but the limitations on individuals would kick in and apply once that loss flows up to the

(09:49) individual level right okay all right so there's also some timing rules you know that uh when we're looking at when do you get to claim the loss how does that work Mark well the casualty loss is considered sustained only during the tax year that the loss occurs as fixed by identifiable events occurring in that year a loss may be sustained in the tax year even though repairs or Replacements aren't made until a later year tax spars generally can claim the loss in the year that it occurred or elect to claim the loss on the pr prior

(10:30) year tax return which could be helpful if you if a taxpayer owed a lot of money on their 23 return rather than taking the loss on their 24 return they could go back and take it on the 23 return uh either by filing an amended return or if they haven't filed yet they could still take it on their 23 return uh instead of claiming it as a 24 event that's correct and there can also be a play looking at AGI limits you know if you happen to have a large capital gain in in this year but not in one year the timing can

(11:08) be very important if you're looking at the uh 10% AGI limit on a on the personal casualty loss so absolutely right absolutely right uh so we talked about deducting losses uh where there's a casual but sometimes there's a casualty gain that is um a taxpayer is going to receive more in insurance payments and proceeds than the Basis or of the property they that was destroyed or or even the the damages to that property so if you're getting insurable value at fair market value but your basis is pretty low in that property then when your insurance

(11:44) proceeds come in uh uh they could be pretty high if you don't reinvest all those proceeds um talk a little bit about about recognizing that gain and what could be done sure well a casualty gain must be reported for tax purposes but there is code section 1033 which allows the deferral when you have gain from what's called an involuntary conversion of the property uh if a taxpayer uses all of the insurance proceeds received from a casualty to purchase replacement property within a required period the Casual gain will not

(12:17) be taxed however the basis of the replacement property is reduced by any untaxed gain thus the gain is deferred but not avoided uh it's built into the replacement property so gain will be recognized to the extent the cost of the replacement property is less than the amount of insurance proceeds uh deferral period can be 2 years to four years depending on the property and depending on the disaster um and I I would just say in the over you know an overarching policy Point here is that they you know Congress doesn't really

(12:55) want people to have to pay tax on getting insurance from uh disaster coverage and so hopefully with proper planning and consultation with your CPA you will avoid reporting that gain but as I said earlier having an actual tax gain is not uncommon in these situations having an economic gain is uncommon there's a distinction there right and and if it's a personal residents uh there is still the gain exclusion of 250,000 or 5 00,000 uh that can be used if some of these Insurance proceed gains are going to be recognized

(13:35) so there's still that opportunity to consider as well okay so Sarah let's just flip back to that uh uh that our related issue of uh deadline I'll just call it deadline relief uh in conjunction with Federal disasters so uh there are some nuances here but can you explain the you know you know the general feel of this program obviously we can't go into the details of whatever even the whatever 60 or whatever there have been this year but in the big picture how does this work right so uh using hurricane Helen as an example um then and and South

(14:16) Carolina where I am uh that the relief offered by the IRS is driven by first FEMA has to do their work and Survey the area to declare to get the the Federal designation as a federally declared disaster then the IRS can act to provide relief so there's usually some bit of lag and timing in there um and so what the IRS did is push off the filing due date and payment due date for all tax returns that are initially due or extended returns that are due in the period from uh the date they determine is the start of the disaster in that

(14:57) area all the way out until some period of time in the case of Helen it's till uh May one uh that tax returns and payments that are due between September uh 25 I believe it is until that date can be filed uh so that means third fourth quarter estimated tax payments first and second quarter estimated tax payments extension payments uh 2024 tax returns any 23 extended tax returns that haven't been filed can all be filed uh in that later date that is not a new extension date it is a postponement of the filing date which is very important when

(15:39) considering the statute of limitations unless the IRS extends the statute of limitations to incorporate these extended periods uh that's very important to consider not necessarily today but if you wanted to file a refund claim down the road you're going to have to pay attention to that uh if if you're coming up on the the end of the statute of limitations period um I think the other thing to note is if you are not in one of these official disaster areas say you don't live in South Carolina but you get a K1 from a partnership that is in

(16:16) South Carolina and so therefore your return uh is also eligible for the filing relief your other tax payments are not subject to relief other tax filings but your individual tax return or the return where you're waiting for a K1 from a partnership that is in a disaster area that's delaying its filing uh you to are benefited from that and will not be considered as filing your return late um at at that point so uh does that sort of address of the ideas you were you were thinking about yeah and I'll just add two more little uh

(16:53) comments to that one is if your CPA preparer is in a disaster Zone and you're not uh then you also can get the benefit of some of this uh filing uh postponement uh relief and I think a key Nuance in all this that you know there are all sorts of different uh disaster reliefs offered but uh you really have to pay attention to the difference between payment postponement and filing postponement and in many of these cases uh if the disaster happened after April 15th for example uh you you know in many cases the IRS is going to say you should

(17:35) have had your taxes paid in by April 15th therefore even though we're giving you an extension or postponement deadline deadline on filing we're not giving you an extension on what should have been paid in by April 15th we're giving you an extension on what has to be paid afterwards and that can CH I mean anyway all these are very factual and disaster specific they're looking at that interaction between payment and filing relief and which taxes which specific taxes are you know are subject to what so hopefully that makes sense

(18:10) yeah okay all right so let's move on the final comments um Mark do you have any uh concluding words of wisdom you would like to share well I think it's a you know as you mentioned Brooks uh everything is very factual specific so depending on your situation uh it's important that you reach out to to us or or or to your tax prepare to determine you know what opportunities are there for you in this situation but Brooks I appreciate being here today and thank you for having me awesome all right Miss McGregor uh yeah I would say

(18:44) recordkeeping uh even though it's difficult following a disaster keeping good records of all the expenditures made to recover the property prepare the property um uh and and use that if you're going to use that as the basis for claiming your losses really important to uh keep good documentation about um that you didn't over restore your property you put it back to where it was before and this is the cost and the effort that it took okay and for my part you know I'll Echo what Mark said there's a lot of complexity in this area um I I uh

(19:21) sometimes can be hard on our IRS and some of the uh bureaucracy and its communication but I think one I I do think they do a particularly nice job on disaster relief uh pronouncements and keeping track of them on the website so we'll put a link in with all this stuff um uh and you can go out there by state and look at exactly what uh relief is available by state and by County fairly uh fairly easily it is one of the better I I I really do think it's one of the better things that the IRS does do okay I think that's a wrap on today's

(20:00) discussion on disaster relief Provisions um thank you for listening in a quick disclaimer that we are not providing tax advice on this podcast please consult with your Tax Advisor hopefully at Cherry Bekaert with your specific tax issues or to discuss information from today's podcast check out the firm's website at cbh.

(20:21) com for the latest guidance and materials on this and other tax and business topics this concludes today's podcast please like share and subscribe thank you Mark thank you Sarah thank you our listeners for spending your time with us we truly appreciate it let's call it a day and go forth and peace [Music]