If you were the victim of a casualty loss you may be eligible for a tax deduction on your current or prior year’s federal income tax return. Casualty losses that are sudden, unexpected and unusual events such as hurricanes, tornadoes, and certain straight-line winds, may qualify as deductions.
However, if you had a casualty loss and received insurance reimbursement, it could also be considered taxable income if the reimbursement results is a casualty gain. There are specific rules associated with casualty gains. For example:
By definition an “involuntary conversion gain” occurs when you get an insurance or other payer reimbursement that exceeds your adjusted basis in damaged property. An involuntary conversion is treated as a sale and can result in taxable income. This is true even when the casualty property is your personal home and the gain is in excess of the allowable exclusion.
There are several factors that determine if your gain is taxable or not. For instance, if you choose to replace the damaged property with similar property. This choice permits you to postpone all or part of the tax.
Usually, you will have 2 years to replace your damaged property. You may also have the option to request an extension for one additional year. However, when your location I is declared a federal disaster area, you will have up to 4 years to make the replacement.
If you need more tips contact our office at (260) 497-9761 to schedule an appointment with our advisors. At Summit CPA we offer multiple resources to assist you with all of your financial needs.