The following briefly discusses the tax implications for those who have been affected by the wildfires in the following California counties: Sonoma, Napa, Mendocino, Lake, Butte, Nevada and Yuba.
On October 10, 2017 the above counties were identified as being in a disaster area. If you have been affected by these wildfires and have not yet addressed this issue with your tax professional, please read on. This information will be helpful in becoming aware of your options and to take action or, at least, consider making an appointment to discuss this issue with your tax professional.
Many people have suffered great financial losses and emotional stress due to these fires. Those affected need to understand the tax and financial implications of the losses and what is necessary to document those losses in the event the tax authorities call upon them to support the losses claimed. A good number of people do not know that the tax laws allow people so affected to deduct a disaster loss on their income tax return.
The loss, if you have one, can be taken on your 2016 or 2017 income tax return. Generally, the disaster or casualty loss is taken in the year that the loss occurs. However, if you have a loss from a federally declared disaster you have the option to take it sooner. To take the loss on your 2016 return you will need to file an amended tax return for that year. The amount of the loss suffered from a disaster, such as the wildfires, depends on whether the property was personal use (e.g. your residence) or business or income producing property (e.g. rental property). The computation of the loss and the deductible amount is fairly complex.
For personal use property the loss is generally determined based on the decrease in the fair market value of the property immediately before the disaster and the fair market value of the property after the disaster, less any insurance reimbursement received on the property. Even though your home may have been completely destroyed, the land upon which it sat still has value. The fair market value of this land post-disaster needs to be determined. The calculation of loss is the same for the contents (e.g. furniture, appliances, etc.) of the property but is reported separately from the real estate. The loss is reduced by $100 (the $100 rule) per disaster. The deductible amount is the amount of the loss that exceeds 10% of your adjusted gross income (the 10% rule) for the year – 2016 or 2017 depending on the year you elect to take the loss.
Recent property appraisals on your residence or on-line at sites like Zillow can assist you in determining the fair market values before the disaster. The after disaster fair market values (i.e. the land) probably will prove a bit more difficult to determine. The applicable county assessor’s office maybe able to assist you with the post disaster values for land.
For business or income producing property the loss calculation is similar to the personal use property calculation except any depreciation taken on the property must be subtracted in determining the amount of loss that is deductible.
It is recommended that you seek out a competent professional (CPA, EA, Attorney, etc.) to assist you with this issue and to help you in your decision as to which year the loss should be reported.