DOES THE 10% FEDERAL DISASTER EXCLUSION ONLY APPLY TO PRINCIPAL RESIDENCE?

DOES THE 10% FEDERAL DISASTER EXCLUSION ONLY APPLY TO PRINCIPAL RESIDENCE?

(A question asked recently of this blog)

The Tax Code treats personal disaster losses differently from disaster losses attributable to business and investment property. The tax deduction for a personal disaster loss is reported originally on Form 4684 page 1, which is carried to Schedule A of Form 1040. If the personal loss is in excess of the amount that can be absorbed on the return for the year it is originally claimed, the unused amount is treated as a Net Operating Loss like any other ordinary Net Operating Loss. For business and investment losses, the deduction is reported on page one for Form 1040 for individual taxpayers, ((originating on Form 4684, page 2, carried to Form 4767 and then page 1 of Form 1040).

For all losses that are reported on Form 4684, page 1 (personal losses), after computing the basic loss attributable to each category on Form 4684, there are two limitations. The first limitation is $100 that is applied to each casualty / theft loss incident for the year, not necessarily each category of assets reported on the Form 4684. If your home was damaged along with the contents and a vehicle in the same loss event, each category would be reported in separate columns on Form 4684, but they are all one loss and therefore only one $100 limitation is applied. If you had two separate losses during the year, then there would be $200 of limitations applied.

There is one more limitation that is applied to personal losses. The loss on Form 4684, page 1 (personal losses), is reduced by 10% of Adjusted Gross Income (AGI). AGI is the number at the bottom of page 1 of form 1040. For high income taxpayers, this adjustment can eliminate any deduction.

Recently, I spoke to taxpayers who had two losses in Super Storm Sandy. They had major damage to their personal residence and a rental property. Assuming that they computed a loss for both properties, the rental property loss on page 2 of Form 4684, goes to Form 4797 and then to page 1 of Form 1040. The personal loss is reported on Page 1 of Form 4684. Interestingly, since the rental loss goes to page 1 of Form 1040, it reduces the AGI which will affect the deductible amount of the personal loss reported on page 1 of Form 4684.

There is no difference between the 10% of AGI adjustment that is applied for disaster losses and other casualty / theft losses.

Several years ago Congress passed a number of special rules for specific disasters during a two year period. The way Congress paid for the special rules was by increasing the $100 limitation to $500, but for the specified losses the 10% of AGI reduction was eliminated. That is the only time that the 10% of AGI adjustment has been eliminated.

This blog, “AccountantForDisasterRecovery.com” has been addressing taxpayer income tax issues related to catastrophic losses for more than five years.

All rights to reproduce or quote any part of the chapter in any other publication are reserved by the author. Republication rights limited by the publisher of the book in which this chapter appears also apply.

	JOHN TRAPANI
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This material was contributed by John Trapani. A Certified Public Accountant who has assisted taxpayers since 1976, in analyzing and reporting transactions of the type covered in this material.  

Internal Revenue Service Circular 230 Disclosure

This is a general discussion of tax law. The application of the law to specific facts may involve aspects that are not identical to the situations presented in this material. Relying on this material does not qualify as tax advice for purpose of mounting a defense of a tax position with the taxing authorities

The analysis of the tax consequences of any event is based on tax laws in effect at the time of the event.

This material was completed on the date of the posting

© 2013, John Trapani, CPA,