A question many Haywood County residents will be asking this tax season is whether a deduction is permissible for disaster losses. Today’s discussion will primarily be for individuals with losses to a primary residence and household furnishings.
Disaster loss rules generally apply to a federally-declared disaster area, and Haywood County qualifies. Begin with Form 4684 (Casualties and Thefts) and use DR-4827-NC as the disaster number. The allowed loss is then transferred to Schedule A as an itemized deduction. The loss can only be deducted if the amount plus other itemized deductions exceed the standard deduction.
The general rule for deducting a disaster loss is that reimbursements are subtracted from the total loss before claiming a deduction. Insurance proceeds, government grants (i.e., FEMA, state or local), and volunteer labor are all considered forms of reimbursement.
In addition, there are a $100 floor and a limitation of ten percent (10%) of Adjusted Gross Income (AGI). The floor and limitation are also subtracted from the loss before claiming a deduction. If AGI was lower in 2023, it is permissible to report the deduction on the 2023 Tax Return, however, this election must be made by October 15, 2025. The 2023 Tax Return may be amended to make this election.
There are two safe harbors for calculating losses. One is an itemized, signed contract between a licensed general contractor and the homeowner. The loss amount may only include the cost to restore the home to the condition immediately prior to the disaster. This approach would exclude the cost, for example, to elevate a home since the elevation did not exist immediately prior to the disaster.
The second safe harbor is an appraisal by a licensed appraiser which documents the decrease in fair market value as a result of the disaster. Appraisals may already be required to obtain federal assistance, and the same appraisal may be used for the gross amount of the deduction before reimbursements.
Losses may be deducted for household furnishings at the replacement value. Subtracted from this amount is 10% of the replacement value for each year the item was owned (Fair Market Value). Then, determine the original cost of the item and subtract any reimbursement (Cost). The lower of Fair Market Value or Cost is the amount of the deduction.
Business losses, including rental property, are more complex, so you should discuss it with your tax adviser.