Hurricane Katrina: Claiming Casualty Losses

Taxpayers or their businesses may claim disaster-related casualty losses on their Federal income tax return for either this year (2005 returns) or last year (2004 returns). If any of the loss is recovered from insurance, they must reduce the amount of the loss claimed accordingly. A casualty is the damage, destruction or loss of property that results from sudden, unexpected or unusual events, such as hurricanes, tornadoes or floods.

A casualty loss claimed on the 2004 return (original or amended), will result in an earlier refund. Depending on the circumstances, however, more may be saved in taxes by claiming the loss on the 2005 return.

Normally, taxpayers can fully deduct casualty losses on business property or income-producing property (e.g., a rental property) on their personal return, but not those on personal-use property (e.g., a house, car or boat). However, under Katrina Emergency Tax Relief Act (KETRA) Section 402, a personal casualty may now be fully deducted (assuming deductions are itemized) if it:

• Arose in the Hurricane Katrina disaster area (see Exhibit 3) and resulted from the hurricane;

• Is not covered by insurance or other reimbursements; and

• Occurred after Aug. 24, 2005.

Note: Determining casualty losses can be complicated; see IRS Pub. 547, Casualties, Disasters and Thefts, available at www.irs.gov/publications/p547/index.html; see also JCX-69-05 (9/22/05), p. 30, and News Notes, Hurricane Katrina Casualty Losses, TTA, December 2005.

Replacing Destroyed Property

If taxpayers or their businesses received insurance proceeds to replace property destroyed by Hurricane Katrina, KETRA Section 405 gives them a longer time in which to invest them in replacement property before incurring Federal income tax liability on any gain; see also Caveat, below.

The new deadline for replacing Katrina-destroyed property begins on the date the property was destroyed and ends five years after the close of the tax year in which the gain on the property is realized (usually, the year insurance proceeds are received). To qualify for this extended period, the following requirements must be met:

• The property must have been destroyed after Aug. 24, 2005, as a result of Hurricane Katrina.

• The destroyed property must have been located in the Hurricane Katrina disaster area.

• The destroyed property must be replaced with property, substantially all of the use of which is in the Hurricane Katrina disaster area.

Caveat: If destroyed property is replaced with property located or used outside the Hurricane Katrina disaster area, taxpayers or their businesses have only three or four years (depending on the type of property) from the time they receive insurance proceeds to purchase replacement property.

Determining if and when gain is realized under these circumstances can be complicated; see IRS Pub. 547 to determine if an insurance payment received to replace destroyed property could create gain subject to Federal income tax.

From Linda Gurene, San Antonio, TX