When Disaster Strikes - Unisured Home Losses

Uninsured Home Losses Could Be Tax Deductible

Pompeii, Mt. Versuvius
Disasters are generally unexpected. © Elizabeth Weintraub

By Julian Block, Attorney

Did you know that the tax code allows you to claim tax deductions for household damage caused by thefts, vandalism, fires, floods, hurricanes and others kinds of casualties? But the law imposes several restrictions.

Tax Deduction Qualifications and Limitations

Relief is available only for uninsured home losses. They must be reduced by any settlements you receive, or expect to receive, from your homeowner’s insurance or renter’s insurance.

Nor do you get any write-off for the first $100 of each theft or casualty loss.

The major limitation is that total home losses generally are allowable only to the extent they exceed ten percent of adjusted gross income, the amount listed on the last line of the first page of the 1040 form. The general rule is subject to an exception. No reductions of $100 or ten percent for home losses caused by Hurricanes Katrina, Rita and Wilma that battered the Gulf Coast in 2005.

There are other problems for people with hefty deductions that surpass the ten-percent threshold. IRS sleuths learned long ago that most of them are unable to substantiate their home losses because they neglected to keep adequate records and have to rely on what, at best, are estimates, assuming they are even able to recall, for instance, all those valuable and not-so-valuable belongings stored in their closets. So the ritual response of the feds is to throw out or trim unsupported estimates, a strict approach that has been sustained by the courts in countless decisions.

Take, for example, a case in which an unsympathetic United States Tax Court emphasized that it “bears heavily” against taxpayers who base their home loss estimates mostly on recollections, not records.

Nevertheless, an understanding IRS wants to ease the burden for people who suffer home losses and fall victim to thefts, casualties, or disasters.

The agency offers free guides about tax relief for disasters such as Publication 2194, Disaster Losses Kit For Individuals, and Publication 4492, Information for Taxpayers Affected by Hurricane Katrina, Rita & Wilma, among others. Or call the I.R.S. at this toll-free number: 800-TAX-FORM (829-3676). (As long as you are doing that, also get Publication 910, Guide to Free Tax Services. It supplies a complete list of IRS booklets, summarizes what they cover, identifies the many materials and services available, and explains how, when, and where to get them. To order current and prior year publications or forms, use the toll-free number.)

Inventory the Contents of Your Household

Publication 2194 includes a handy workbook with schedules for listing, among other things, clothing, jewelry and a residence’s contents on a room-by-room basis. Schedules for rooms and other areas have separate sheets for the entrance hall, living room, dining room, kitchen, bedrooms, garage, and other sections. Each sheet lists belongings generally found in a specific area.

As an example, the entrance-hall sheet lists chairs, clocks, draperies, lamps, mirrors, pictures, rugs, tables, umbrella stands and wall fixtures, with plenty of space to enter additional items.

Alongside each property item are seven columns in which to record the following details: the number of items; date acquired; cost; value before the loss; value after the loss; decrease in value; and amount deductible as a home loss.

Yes, you might never need to calculate deductions for casualty or home theft losses. But Publication 2194’s workbook will help you inventory household goods and personal property. That list can prove to be indispensable when, for instance, you want to reconsider the adequacy of your insurance coverage, file insurance claims, plan to move — or even create a household inventory for heirs.

To be sure, it is a disheartening project to list all your possessions, their cost and other information. Still, creating a list in advance is incomparably easier than trying to remember all those details after property is stolen or destroyed.

Whether the inventory is a first-time task or an update, it is prudent to keep a copy outside your home in a safe deposit box or some other secure location.

Julian Block is an attorney, syndicated columnist and former IRS special agent (criminal investigator). This article was excerpted with permission from the pamphlet: "The Home Seller's Guide to Tax Savings: Simple Ways For Any Seller to Lower Taxes To The Legal Minimum," which can be ordered by sending $19.95 for a postpaid copy to J. Block, 3 Washington Sq., #1-G, Larchmont, NY 10538.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.