Kelly Bullis: Forest Fire Loss Deduction Explained

My heart is just sickened by all the devastation caused by the forest fires in our region this year. In many places, it looks like a nuclear explosion has gone off. He may never be beautiful again in my life.
As an avid biker (I love to ride my Indian Roadmaster as often as possible), I enjoyed riding the Sierra Nevada. On a recent drive through the devastation of the Tamarack fire, I saw many houses burned down. Now Calder’s Fire… JUST HORRID!
So what if you were one of the many unfortunate people who lost part or all of their homes in one of these fires? Recent congressional legislation to make it a bit easier to deduct your loss “plus” on your personal income tax return has now expired. (Only for disaster losses through February 25, 2021.) Due to the scale of all of these fires, there’s a good chance Congress will extend this deadline further. Time will tell us.
Here’s how to calculate your deduction for losses. Under the Tax Cuts and Jobs Act 2017, you can deduct the lesser of (1) the adjusted tax base of your property or (2) the decrease in the fair market value of your property by reason for the accident. There are some limitations. Whichever method you use, you then subtract $ 100 per claim, then 10% from your adjusted gross income (AGI).
Here is an example. Let’s say you lost your whole home in one of these devastating fires this year. You initially paid $ 500,000, then added major upgrades costing $ 100,000, so your “adjusted base” in your home is $ 600,000. Let’s say your AGI is $ 100,000. So your “loss” is $ 600,000, but you received $ 575,000 in insurance proceeds.
Your remaining loss of $ 25,000 is reported on your personal income tax return by first reducing it by $ 100, which makes your loss $ 24,900 ($ 25,000 – $ 100). Then 10% of your AGI is $ 10,000 ($ 100,000 x 10%). Thus, your deduction for “loss of damage” is $ 14,900. (Gross deductible loss of $ 24,900, reduced by 10% of the AGI of $ 10,000.)
Now get this. As the law currently stands, you will never get 100% of your loss as a tax deduction. Basically you need to reduce the loss by 10% of your AGI. The lower the AGI, the larger the deduction. Conversely, the higher your AGI, the less you will benefit from a deduction.
But wait! There is more! You must deduct the losses incurred on Schedule A – Itemized Deductions. Most people these days don’t come close to the “standard deduction”, so to report loss of damage on Schedule A, that means you have to itemize everything, which means that part of the loss of damage will be lost to make up the shortfall in your itemized deductions.
Example: You normally have $ 15,000 in actual itemized deductions. Your standard deduction is $ 25,000. So, in order to deduct your damage loss, you will need to use up to $ 10,000 ($ 25,000 – $ 15,000) of that damage loss before you get a tax benefit to deduct the loss.
If Congress does extend the special casualty provisions that just expired on February 25, the AGI limitation is removed, but the floor of $ 100 per event is raised to $ 500.
Did you hear? Job 6:13 says, “Do I have help in me, when the resource is driven out of me?”
Kelly Bullis is a Chartered Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com. Also on Facebook.