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The dollar value of property losses due to fires, floods, tornadoes, earthquakes, lightning, freezes, etc. can be substantial. Federal income tax regulations often provide relief by allowing deductions for losses of both business-use and personal-use property. This fact sheet describes losses to property, the process used to determine if you have a deductible loss, how insurance proceeds and cost share benefits are treated, and how to reconstruct records to document a loss. Examples help explain the rules that apply to property found on the farm including buildings, machinery, livestock, feed, supplies, personal residence and the contents and personal vehicles. A list of related Internal Revenue Publications are included at the end of this fact sheet. These publications provide additional information about disaster losses.
A casualty is defined as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Therefore, the casualty event must not be gradual or progressive deterioration, an event that is anticipated or intended to occur, or a day to day occurrence from an activity in which the taxpayer is engaged. A deductible loss can occur from a vehicle or equipment accident, earthquake, a fire that was not willfully set by the taxpayer, flood, freeze, lightning, hurricane, tornado, terrorist attack, vandalism, volcanic eruption, or government-ordered demolition or relocation.
To determine the extent of a loss, the owner of the property needs to compare the property’s condition immediately before and after the event to determine the extent of the loss and whether the amount may be deductible against taxable income. If the damaged property was insured, there may be the possibility of a taxable gain if the insurance reimbursement is greater than the amount of the deductible loss. This article addresses casualties and the information needed to determine whether or not a taxpayer will have a deductible loss or a taxable gain depending upon the type of property that was damaged or destroyed and if it was or was not insured.
Rural Tax Education
disaster, losses, tax, rules
Education | Higher Education | University Extension
Hobbs, JC, "Disaster Losses and Related Tax Rules" (2017). Rural Tax Education. 27.