IT'S "YOUR" DISASTER
When a catastrophe hits it is a personal disaster whether or not the federal government declares it a “Federal Disaster Area.” The process for an area being declared a “Federal Disaster Area” is usually handled by political entities. The timing is very critical and the people who are directly involved are dealing with personal matters, including the health and safety of their families. These people are not thinking about “Federal Disaster Declarations.”
But, when the politicians do not respond, or are given “logical” reasons why the event is not a “Federal Disaster” the people must step up and fight for the Declaration.
The Process:
The Robert T. Stafford Disaster Relief Act sets out the process and parameters for the federal government’s declaration of the “Federal Disaster Area.” People who experience a Federal Disaster are able to benefit from financial and tax benefits provided by various agencies of the federal government.
The Income Tax benefits are different for those who realize a gain and those who realize a loss; they include the following:
Gain or Loss
How can I have a gain, I just lost my home?
The basic tax computation depends on four numbers to determine whether a gain or loss has been realized.
Those amounts are:
1. Insurance proceeds – Structures and Personal Property,
2. Cost basis of home, including building, land improvements, land and building improvements and modifications since acquisition,&
3. Decrease in value as a result of the catastrophic event, defined as the difference between the
(a) Fair market value of the property immediately before the event and
(b). Fair market value immediately after the event,
If the insurance proceeds (1) exceed the cost basis (2), there is a gain that has been realized regardless of the economic loss which is based on the Scope of Loss and Appraisals.
If the insurance proceeds (1) are less than the cost basis (2) and the loss (3) is greater than the insurance proceeds (1), there may be a loss. If the loss (3), reduced by the insurance proceeds (1) is greater than the cost basis (2) reduced by the insurance proceeds (1), then there is a casualty loss.
In the case of a casualty loss, the computed loss is reduced by $100 or $500 per incident and all casualty losses for the year are further reduced by 10% of Adjusted Gross Income for the year of deduction. Adjusted Gross Income is the amount on the bottom of page one of Form 1040, the annual personal income tax return.
Now that we have the basics, let’s look at the difference between a loss or gain that is part of a federal disaster and one that is not. This discussion only deals with the differences.
LOSSESFor federal disasters taxpayers may claim the loss on the tax return for the year of the loss or the return for the year immediately preceding the year of the loss. This would allow a taxpayer in an event such as the Jesusuta Fire to deduct the loss on the 2009 income tax return or on the 2008 return. If the 2008 return has already been filed, an amended return may be filed. Based on the time of year of the Jesusuta Fire, the amended return must be filed no later than April 15, 2010. (No extensions are permitted.)
For disasters occurring in 2007, 2008, and 2009 additional rules apply if the loss claimed causes the taxable income to be less than zero, creating what is called a “net operating loss.” Additionally, for disasters only and in these years only, the 10% of AGI reduction does not apply.
GAINS
In the case of gain, the tax on the gain can be deferred. To accomplish this, the taxpayer must reinvest the total insurance proceeds received for the loss in what is referred to as “Qualified Replacement Property” (QRP). QRP is property that has the same use and function as the property lost (In this case: any personal use real estate). In other words, if the taxpayer rebuilds the home or purchases other personal use real estate, there will be no current taxes due. (For any gains, whether or not in a disaster area, the $250,000 / $500,000 (Section 121) gain exclusion may apply.) The replacement period has two important beginning dates. The first is the date of the event. The second is the date on which the cumulative insurance proceeds received exceed the cost basis of the property lost. The replacement period is the period starting with the date of the event and extending for a period of years starting with the end of the first year in which the insurance proceeds exceed the cost basis. For disasters the number of years is four years after the end of the first year in which a gain is first realized. For none disasters it is only two years.
The second benefit in the case of a disaster is that the insurance proceeds received for personal property do not have to be reported and no computation, for tax purposes need be determined. This does not preclude a claim for a loss, if the insurance proceeds are less than the cost basis of the personal property lost. Personal property is the most difficult aspect of a casualty loss in the case of a catastrophe such as a fire that consumes the whole home and everything in it.
Additionally, in the case of a disaster, the insurance proceeds received for the personal use primary home structure may be reinvested not only in replacement real property and improvements, but also in contents. This is often a benefit if the replacement home is not completely reconstructed by the end of the replacement period, but personal property has been acquired. Additionally, if the taxpayer wishes to rebuild less, this may also be a useful advantage.
None of the benefits discussed above (except the Section 121 exclusion) are available to a group of people who have experienced a catastrophic event that has not been declared a “Federal Disaster Area.”
My suggestion when the politicians fail you:Use the internet. The FEMA site “http://www.fema.gov/news/disaster_totals_annual.fema” lists disasters by year and by state. Review each disaster for the last several years, by area involved, number of home lost, type of loss, economic impact of loss relative to size of community and any other metrics that you can think of. I am confident that there is a disaster that is less significant than many that have been overlooked as a “Federal Disaster Area.”
Once you have come up with one or two, or many, Contact your representatives.
Politicians like to give speeches, but they need to act for their constituents.
Senator Feinstein is quoted in a 2001 IRS memo (ITA 200114046). The ITA covered special circumstances related to the Cerro Grande Fire in New Mexico. The Senator’s comments relate to the importance of the Senate’s passage of legislation in 1993 that provided significant tax relief for homeowners who lose their home in a federal disaster.
Section 1033(h) was added to the Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, just prior to the bill’s finalization by the Conference Committee. This provision was first introduced in 1992, as part of H.R. 11, which was vetoed by the President on other grounds. It was also introduced in 1993 as S. 364. The provision contained in these earlier bills was incorporated into Pub. L. No. 103-66 with virtually no changes. In describing the earlier Senate version of the provision, Senator Feinstein stated:
[T]his legislation would exclude capital gains on any unscheduled personal property. Insurance proceeds rarely if ever reimburse a taxpayer fully for their loss and this would minimize the record keeping involved in listing losses of all personal property and the replacement cost of normal household property....
139 Cong. Rec. 15 (February 16, 1993). Senator Feinstein’s remarks suggest that Congress was concerned with allowing taxpayers to replace “normal household property” with a minimum of record keeping and without having to report capital gains when they are usually not reimbursed fully for their losses.
Many individuals have “normal household property” which they do not routinely keep in their homes. For example, some individuals may store their golf clubs or baby strollers in the trunks of their cars. Additionally, some individuals may keep radios or exercise equipment at their offices. If a homeowner’s or renter’s policy covers such items when they are not physically located in the principal residence, and they are destroyed in a Presidentially declared disaster, then a taxpayer should not be denied the gain exclusion of §1033(h)(1)(A) simply because an item was in the trunk of a car or on the desk at work instead of in the basement or attic of his or her principal residence.
As to The Robert T. Stafford Disaster Relief Act, I suggest that you become familiar with Title IV, V and VI. The document is available on the Web in PDF format at:
http://www.fema.gov/pdf/about/stafford_act.pdf. (Coy attached)
