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While
some people are cleaning up after Hurricane Claudette and others were not
severely affected by the storm, there are still three months left in
hurricane season. The tax law provides for deductions related to
certain disasters. Hurricanes and floods are among several
situations in which a casualty loss is deductible.
The
amount that is deductible as a casualty loss is the lesser of (1) the
difference between fair market value of the property just before the
casualty and the fair market value afterwards or (2) the adjusted basis of
the property just before the casualty. If business or income
producing property is completely destroyed, the deduction is the adjusted
basis of the property.
If
personal property is the subject of a casualty, there is a $100 floor,
above which is deductible, and the deduction is limited to 10% of adjusted
gross income. These limits do not apply to business or income
producing property. The amount of casualty loss is reduced by any
insurance or other compensation received.
The
basis of damaged property is decreased by insurance or other
reimbursements and the amount of the deductible loss. The basis is
increased by any amounts spent to restore the property.
If
a gain is realized, for example insurance reimbursement is greater than
the basis of the property, the gain can be deferred. An election is
made to defer the gain and replacement property must be purchased within
the replacement period, generally two years after the year in which the
gain is realized. Any reimbursements not spent on replacement
property is reported as a gain.
A
special rule exists for areas declared by the President as disaster areas.
In such a case, the loss can be taken on the tax return for the year
immediately preceding the year of loss or the year of loss. The
election to deduct the loss on the previous year's tax return must be made
by the deadline to file the current year return. Currently the
counties designated as disaster areas by the President are Calhoun,
Jackson, Matagorda, Refugio and Victoria. Others may be designated
in the near future.
Additional
counties qualifying as disaster areas:
As
of 7/22/03 - Bee, Brazoria, Galveston and Goliad
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