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Safe Harbor Methods for Determining Natural Disaster Casualty Losses

 

By David P. Donnelly, CPA-Houston, and Lindsay Verbit, CPA

With the natural disasters that occurred in 2017, many CPAs are helping their clients with casualty loss deductions. Some of these clients may expect the CPA to assist in determining the amount of the loss. However, this is not a service that CPAs are licensed to perform.

The IRS has issued guidance for these taxpayers by providing safe harbors for determining the amounts of these losses in Revenue Procedures 2018-8 and 2018-9.

Revenue Procedure 2018-8 provides safe harbors for estimating casualty losses for personal-use residential property and personal belongings.

For personal-use residential property, taxpayers, regardless of their location, can use the following methods:

  • Estimated repair cost: A taxpayer may use the lesser of two repair estimates from licensed contractors to determine their loss. This method cannot be used for casualty losses greater than $20,000.
  • De minimis: A taxpayer may estimate the cost of the repairs required to restore the personal-use residential real property to the condition existing immediately prior to the casualty. This method cannot be used for casualty losses greater than $5,000 and must be based on a good-faith estimate.
  • Insurance: The taxpayer may use an insurance company’s estimate of loss.

For taxpayers in federally declared disaster areas, in addition to the above, the following methods are acceptable:

  • Contractor safe harbor: A taxpayer can use the repair cost from an independent licensed or registered contractor, or
  • Disaster loan appraisal: The taxpayer may use the damage estimate from a federal disaster loan.

In all cases, the taxpayer can only use repair estimates that restore the property to the standard and condition immediately before the casualty. Any cost used to increase the value above its original state may not be included.

For personal belongings, the taxpayer can use:

  • A good faith estimate of the loss, if the loss is less than $5,000.
  • Current replacement cost: The taxpayer may use the current replacement cost, decreased by 10 percent per year of ownership to a minimum of 10 percent of the replacement cost. See the table below:

            o   Specifically excluded are boats, aircrafts, vehicles, trailers, mobile homes and antiques

Personal Belongings Valuation Table

 

Year

Percentage of Replacement Cost to Use

1

90%

2

80%

3

70%

4

60%

5

50%

6

40%

7

30%

8

20%

9+

10%

 

Revenue Procedure 2018-9 provides a cost index method for taxpayers to determine their losses to personal residential property due to the 2017 Harvey, Irma and Maria federally declared disaster areas.

The tables establish a cost per foot value for different losses on a personal residence under the circumstances listed below:

  • Total losses
  • Near total losses
  • Interior flooding over one foot
  • Structural damage from wind, rain or debris
  • Roof covering damage from wind, rain or debris
  • Damage to a detached structure
  • Damage to decking

Cost indexes are provided for each category of loss, for each of the different geographical areas and for different sizes of residential property. See the table below as an example for total losses:

 

Personal Residence Size and Location

Texas

Louisiana

Florida

Georgia

South Carolina

Puerto Rico

U.S. Virgin Islands

Small Personal Residence (Personal residence is less than 1,500 square feet)

$231

$231

$235

$231

$231

$231

$293

Medium Personal Residence (Personal residence is between 1,500 and 3,000 square feet)

$195

$195

$208

$195

$195

$195

$248

Large Personal Residence (Personal residence is greater than 3,000 square feet)

$174

$175

$193

$174

$175

$175

$222

 

For the taxpayer, the methodology to use Rev Proc 2018-9 appears to be:

  1. Determine the type of loss based on the information in Section 3.03(1-7). This prescribes which tables should be used. Certain tables may be used in combinations with one another.
  2. Ascertain the total number of square feet in the property. This information may be available from the taxpayer or some appraisal districts have this on their websites.
  3. Based on the size and location of the property, determine which section of the table to use.
  4. Multiply the number of square feet by the allowance for the location and compare to the basis of the property. The smaller of these amounts is the loss.

In all cases, whether using Rev Proc 2018-8 or 2018-9, losses must be reduced by insurance reimbursements and the value of no-cost repairs.

These two Rev Procs appear to be very useful to clients who are not willing to pay the cost of a before and after appraisal of their property and who otherwise may pressure their tax professional to help them estimate those losses. 

Disclaimer: This is a summary of some of the information provided in the revenue procedures. Practitioners are cautioned to read and understand the guidance before advising clients on how to use these safe harbors.

https://www.irs.gov/individuals/tax-law-provisions-for-disaster-areas

https://www.irs.gov/pub/irs-drop/rp-18-08.pdf

https://www.irs.gov/pub/irs-drop/rp-18-09.pdf

 

Comments

Sawyer

Hey David P. Donnelly,

Thanks for sharing!

Sawyer

Thanks for sharing!

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