The IRS has issued guidance for individuals who realized unreimbursed Code Sec. 165 casualty losses to their residences and personal belongings due to natural disasters. As an alternative to substantiating actual loss in value, the IRS now will allow use of seven safe harbor methods of calculating casualty loss deductions, depending upon the taxpayer’s situation.
Caution. Under the new Tax Cuts and Jobs Act, the personal casualty loss deduction is temporarily limited in tax years beginning after December 31, 2017, and before January 1, 2026, to losses attributable to federally declared disasters. A taxpayer may still claim personal casualty losses not attributable federally declared disasters to offset any personal casualty gains during 2018 through 2025. However, any such personal casualty gains used to offset personal casualty losses attributable to a federally declared disaster are not taken into account in determining the taxpayer’s 10 percent of adjusted gross income (AGI) limitation.
General safe harbors
The following three new safe-harbors apply to any casualty or theft loss:
Estimated Repair Cost Safe Harbor Method, under which a taxpayer may use the lesser of two repair estimates prepared by two separate and independent contractors, licensed or registered in accordance with state or local regulation — for casualty losses of $20,000 or less.
De Minimis Safe Harbor Method, under which an individual may estimate the cost of repairs required to restore the individual’s residence to the condition existing immediately prior to the casualty — for casualty losses of $5,000 or less. This safe-harbor applies to a personal-use residence and to personal belongings.
Insurance Safe Harbor Method, under which a taxpayer may determine the decrease in fair market value by using the estimated loss determined in reports prepared by the taxpayer’s insurance company.
Disaster area safe harbors
The following three additional safe harbors apply to casualty losses incurred within federal declared disaster areas:
Contractor Safe Harbor Method, under which a taxpayer may use the contract price for repairs to the residence (but not over pre-hurricane value) as set out in an itemized contract prepared by a licensed or registered contractor.
Disaster Loan Appraisal Safe Harbor Method, under which a taxpayer may use an appraisal prepared for the purpose of obtaining a loan of federal funds or a loan guarantee from the federal government setting forth the estimated loss the individual sustained as a result of the damage to or destruction of the individual’s residence.
Personal Belongings Safe Harbor Method, under which the loss amount is then determined by reducing the replacement cost by 10 percent for every year the taxpayer owned the item (10 percent for items owned nine years or longer).
2017 storm safe harbor
Cost Indexes Safe Harbor Method. Residents in disaster areas in Texas, Louisiana, Florida, Georgia, South Carolina, Puerto Rico, and the U.S. Virgin Islands, as the result of Hurricane and Tropical Storm Harvey, Hurricane Irma, and Hurricane Maria, are also given costs-per-square-foot tables to determine the decrease in fair market value of their personal-use residential real property. Adjustment for insurance and other assistance must be made.
Comment. To claim a casualty loss, a taxpayer must report the loss on Form 4684, Casualties and Thefts, and should see the special instructions at www.irs.gov/form4684.
(IR-2017-202, Rev. Proc. 2018-8, Rev. Proc. 2018-9)