Irrecoverable Property Loss? The IRS Could Be Your Friend.
Even though we are big fans of insurance and its valuable place in your protection planning, we also understand this basic truth: No one wants to have a claim.
Yet when that times comes, your agent knows your homeowners policy will have a chance to prove its mettle in responding fairly and expeditiously to repair, replace or restore your valuable property. With proper coverage at the proper limits, even catastrophic financial loss to your property due to tornadoes, fires, hurricanes, blizzards and even crime can be minimized. But what about your deductibles? Claims for which no coverage may exit? Or when an insured loss is so severe, it exceeds even the best planned protection?
For any losses not fully recoverable from your insurance, some help may be available from an unexpected source: the Internal Revenue Service.
Specifically, Tax Topic 515 from the IRS actually addresses casualty, disaster and theft losses (including federally declared disaster areas). By referring to this topic, and then information in Publication 547: Casualties, Disasters and Thefts, and in Publication 584: Casualty, Disaster and Theft Loss Workbook (Personal-Use Property), you can find detailed advice on when and how you may be eligible to deduct losses not reimbursed by your insurance on your individual income taxes.
Part of the good news is that the IRS definition of “casualty loss” is quite broad:
A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected or unusual event such as flood, hurricane, tornado, fire, earthquake or even volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration.
It’s not quite as simple as totaling your losses and deducting the amount paid by insurance. (This is the IRS, remember.) You must also consider the adjusted cost based on your property, any decrease in fair market values, salvage value, and other factors that the IRS takes into account to arrive at the final amount you may deduct. Calculations, values and determination of your final deductions are provided on IRS Form 4684.
At a time of loss, any benefit the IRS can offer may prove a welcome addition to your financial recovery. But your agent still wants to minimize your need to deal with the potential complexity and limitations of the IRS requirements with a simple strategy: Minimize your uninsured loss. Schedule time to discuss with your agent a comprehensive review of your current assets at risk and the protection provided by your insurance program. When it comes to losses on your property, let’s work together to keep the IRS deductions as a nice bonus, not your first line of defense.
Be prepared. Be safe!