Wildfire Casualty Loss Deduction Explained

My heart is just sickened by all the devastation from wildfires in our area this year.  In many places, it looks like a nuclear explosion went off.  It may never look good again in my lifetime.  As an avid motorcycle rider (I love to hop on my Indian Roadmaster as often as possible), I have enjoyed riding around the Sierra Nevada mountains.  In a recent ride I rode through the devastation of the Tamarack Fire, I saw many homes burned to the ground.  Now the Calder fire…JUST HORRIBLE!

So, what if you were one of the many unfortunates who lost part or all their home in one of these fires?  The recent Congressional legislation to make it a little easier to deduct “more” of your loss on your Individual Income Tax Return has currently expired.  (Only for disaster losses up to February 25, 2021.)  Because of the scale of all these fires, there is a good chance that Congress might extend that deadline further.  Time will tell.

Here’s how to compute your loss deduction.  Under the Tax Cuts and Jobs Act Law of 2017, you get to deduct the lesser of (1) the adjusted tax basis of your property or (2) the decrease in fair market value of your property as a result of the casualty.  There are some limitations.  Whichever method used, you then subtract $100 per casualty event and then 10% of your Adjusted Gross Income (AGI).

Here is an example.  Let’s say you lost your entire house in on of these devastating fires this year.  You originally paid $500,000, then you added some major improvements costing $100,000, so your “adjusted basis” in your home is $600,000.  Let’s say your AGI is $100,000.  So, your “loss” is $600,000, but you received $575,000 in insurance proceeds.  Your remaining loss of $25,000 is reported on your personal income tax return by reducing it first by the $100, making your casualty loss $24,900 ($25,000 – $100).  Then 10% of your AGI is $10,000 ($100,000 x 10%).  Thus, your “casualty loss” deduction is $14,900.  (Gross deductible loss of $24,900, reduced by the 10% of AGI of $10,000.)

Now get this.  As the law currently stands, you will NOT ever get 100% of your loss as a tax deduction.  Basically, you must reduce the loss by 10% of your AGI.  The less the AGI, the bigger the deduction.  Inversely, the larger your AGI, the less of a deduction you will get.

But wait!  There’s more!  You must deduct casualty losses on Schedule A – Itemized Deductions.  Most folks these days do not come close to the “standard deduction” so in order to report the Casualty Loss on Schedule A, it means you must itemize everything, which means some of the Casualty Loss will be lost in making up the shortage in your itemized deductions.  Example:  You normally have $15,000 of actual itemized deductions.  Your standard deduction is $25,000.  Thus, in order to deduct your casualty loss, you will need to use up $10,000 ($25,000 – $15,000) of that casualty loss before you receive a tax benefit to deducting the loss.

If Congress actually extends the special provisions for casualty losses that just expired on February 25th, then the AGI limitation is removed, but the $100 per-event floor is increased to $500.

Did you hear?  Job 6:13 says, “Have I any help in me, when resource is driven from me?”

Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 882-4459.  On the web at BullisAndCo.com  Also on Facebook.