DISASTER
INCOME TAX REPORTING TIPS
OUTLINE
After
a catastrophic event, the taxpayer whose property has been lost or damaged
cannot ignore the income tax consequences. Consulting a tax professional who
has an in-depth understanding of these consequences and who can guide the
taxpayer to take advantage of the available tax benefits, as well as
understanding and be in compliance with the income tax reporting
responsibilities is essential. Below are the basics to assist taxpayers gather
the data to make choices and decisions.
1 THE COST BASIS OF ASSETS LOST OR
DAMAGED IS CRITICAL TO ANY LOSS OR GAIN COMPUTATION
Cost basis of assets lost or damaged
Real Property Cost Basis
Personal property
Other property
2
ALL PAPERWORK THAT ARISES AFTER THE EVENT IS IMPORTANT.
IT NEEDS TO BE RETAINED
AND PROVIDE TO YOUR INCOME TAX PREPARER INCLUDING ALL GRANTS, SOME OF WHICH MAY
BE NON-TAXABLE GIFTS
Documenting – A Gain or a Loss?
3 THE PHYSICAL CONDITION AND LOCATION
OF ITEMS LOST
Any documentation you prepare for an insurance claim for personal property
should be kept as a beginning point for determining if there is a reportable
loss on your income tax returns
4
IF THERE IS NO POSSIBILITY OF HAVING A LOSS DUE TO
ADEQUATE INSURANCE COVERAGE, THEN YOU DON’T NEED APPRAISALS; HOWEVER, IF THERE
IS ANY CHANCE THAT THERE MAY BE A LOSS, THEN APPRAISALS ARE WORTH CONSIDERING
Valuations (before / after)
Additional rules apply to these appraisals, most appraisers are not aware of
the rules even if they are competent
5
MAINTAIN A DETAIL ACCOUNTING OF ALL THE REPAIR, OR
REPLACEMENT COSTS
Evidence – legal documents / photos
Post Event: Replacements (Repairs and or Acquisitions)
6 MAINTAIN DETAILS OF ALL INSURANCE
PAYMENTS, INCLUDING THE REASON FOR THE PAYMENT
TAX REPORTING FOLLOWS THE INSURANCE PROCEEDS
“A” & “B” Structure (including appurtenant structures such as
outbuildings, detached garages) trees & landscaping
“C” Contents (Personal property)
“D” Additional Living Expense (ALE, Extra expense)
Special Endorsements, “Scheduled Property”
Vehicles, RV’s, Boats, …
7 MAINTAIN RECORDS OF EACH PAYMENT AND
CASH RECEIPTS:
Keep all check COPIES and Source documents
Prepare a spread sheet, include:
Date / Amount / Indication of joint
payee and resolution
Possibly open a separate bank account
(Lender withholding – structure only)
Include in your documentation all
payments paid and received for ALE
8 THERE IS NO PROSCRIBED FORM FOR
REPORTING A DEFERRAL OF GAIIN
INCLUDE IN ANY TAX RETURN, FOR ANY RELEVANT PERIOD, THE FOLLOWING INFORMAITON
FOR THE YEAR BEING REPORTED AND CUMULATIVELY FOR ALL YEARS SINCE THE ORIGNAL
EVENT THROUGH THE END OF THE REPLACEMENT STATUTORY REPLACEMENT PERIOD OR ONCE
YOU HAVE FINALIZED THE REPLACEMETN PROCESS:
WHETHER THERE
IS A GAIN, NO GAIN, OR A LOSS
Regardless of whether your event
generated a gain or loss or neither, the following reporting should be
followed:
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For
year or years of event and receipt of proceeds, and for each year thereafter
UNTIL REINVESTMENT is completed or the replacement period (including
extensions) has expired, report these details by year and cumulatively
Information
related to the return for the taxpayer who owns the property: Event
identification – including any federal or state disaster declarations, (or
the taxpayer is leasing and is contractually liable to the owner for the
damage)
IRC
Section being applied for deferral including an election to defer gain under
the appropriate Code section
Date(s)
of event
City,
county and state in which the covered event occurred
Cost
basis of property converted, identification of "originating
property" - include address for real property
Include
statement: "The event was a direct result of the casualty"
Insurance
proceeds received or expected to be received, by year, proceeds received Less
Gain Excluded and any "recognized gain" = Net Proceeds
realized
Year(s)
and amount of gain realized – (the gain may be realized in more than one
year) – each realization year must be reported
For
replacement properties: Identification of replacement property(ies) or
repairs, type of property, location, proceeds invested
Dates
of reinvestment
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9
MAKE SURE THAT YOU HAVE A CLEAR UNDERSTANDING OF ALL
RELEVANT TIME PERIODS, TAX REPORTING DUE DATES, AND EXPIRATION OF REPLACEMENT
AND TAX EXAMINATION PERIODS.
TIME PERIOD TO COMPLETE QUALIFIED REPLACEMENTS
Extensions of time may be available
in some circumstances
10
TAXPAYERS SHOULD DISCUSS THE WHOLE LOSS SITUATION WITH A KNOWLEDGEABLE
TAX PROFESSIONAL BEFORE CLAIMING ANY LOSS ON A TAX RETURN.
The penalties and potential tax costs hidden in wrong tax decisions can be a
second disaster, one that could cost you thousands of dollars in taxes
11
DON’T RUSH TO DEDUCT
Prematurely deducting a loss before all the facts are known can become very
costly. Search for “Don’t Rush To Deduct” on Disaster Income Tax Advice Blog: www.AccountantForDisasterRecovery.com
This
material covers income tax laws based on the author’s understanding of the
federal tax laws affecting casualties and involuntary conversions. This is
general information. Application to specific cases require fact finding.
Relying solely on this material does not qualify as tax advice for purpose of
mounting a defense of a tax position with the taxing authorities
©
2015 JOHN TRAPANI, CPA, California CPA License # E14777
All
rights reserved, republication permitted with all contact information included
