[StBernard] Casualty Loss Rules from Dan Johnson, CPA

[Westley Annis]

This is CPA, Dan Johnson.  There is a lot of casualty loss misinformation
I have been hearing that I would like to help clarify.

Let's talk about figuring the "loss".  Everybody "believes" they have
losses but do they and how much?

According to the IRS (pub 547) you have to first determine your adjusted
basis in the property before the casualty which in our case was the storm.
 Your adjusted basis is your cost value.  How much did you pay when you
acquired the property?  Add the value of any improvements over the time
you had possession of the property up and until August 29, 2005.  This is
your adjusted basis in the property before the casualty.

The next thing that you have to determine is the decrease in fair market
value of the property as a result of the casualty (the storm).  This is an
extremely important step and not to be taken lightly.  Fair market value
is the amount agreed on by a willing buyer and a willing seller.  I have
heard many people say that their property isn't worth two cents now.  As
far as your personal contents are concerned that is probably true. 
Regarding your structure and land values that is probably not the case. 
In all reality would you be willing to sell your home to anyone for three
cents?  I would think not.  This is where the value of a competent
appraiser comes in. The IRS will be more apt to accept a casualty loss
supported by a well documented appraisal report than a value that came out
of your head.


>From the smaller of these two numbers (adjusted cost basis and decrease in

fair market value), subtract any insurance proceeds or other reimbursement
you received or expect to receive.  Don't miss the "expect to receive"
part.  If you still have not received your insurance proceeds by December
31st and are entitled to the insurance proceeds, include the amount in
your calculation.  If you don't, you will have to report the insurance
proceeds in income in the following year.  In some cases that might not be
a bad thing.  Check with your professional when it comes time to perform
the tax calculations.  In some cases you may end up with a gain instead of
a loss.

Let's use an example, shall we?  You purchased your home and land in 1980
for $75,000 that is now worth $200,000 before the storm.  On August 31,
2005 the appraiser determines your property to be worth $50,000.  You have
a decrease in fair market value of $150,000 ($200,000 less $50,000).  The
lower of the two numbers (adjusted cost basis and decrease in fair market
value) happens to be the adjusted cost basis of $75,000 in this example. 
If you were insured for only $100,000 on your $200,000 home ( a common
underinsured plight) you don't have a loss but you have a gain instead
because your insurance proceeds were greater than your adjusted cost basis
($100,000 vs $75,000).  This is not a welcomed calculation and will not be
well received when sitting in front of your tax professional come tax
season.  That is why it is so important to develop these numbers now while
it is fresh and your consultants have time to comfortably help you with a
plan.  The good news if you have a gain is that the IRS will treat the
gain under the residential sale rules which means that any gain on the
sale of any home that you own over two of the past five years will be
excluded from income tax.  For single individuals the gain cannot exceed
$250,000 and for married individuals the gain cannot exceed $500,000.

Your contents loss is certainly a different story.  The fair market value
of your contents usually do not increase in value over time and will
normally have no value after the storm.  Your adjusted cost basis
(purchase price of your contents) or the fair market value (whichever is
lower) less your insurance proceeds will determine your contents loss. 
Understand that any property that was inherited or gifted to you has no
adjusted cost basis value although in this case the fair market value is
higher.  Therefore, any inherited or gifted property you own that is now
worthless will be ignored for the calculation.

For those of you who need appraisals, I would recommend an appraiser from
St. Bernard Parish.  They know your plight.  They understand your pain. 
I've seen numerous emails from John Scurich who has the necessary
competence and passion for the residents of St. Bernard as much as
probably any appraiser in the parish.

This is the time to develop your list.  This is the time to sit with your
tax "professional" like a CPA or EA.  To maintain their designations they
have to undergo continuing professional education unlike any other tax
preparer who does not have these credentials. Anytime after January 1 is
generally NOT the time to talk to your professional.  They will soon be
too deep in tax season to give you the service you really need and
deserve.  Please do not take your tax issues to people that simply hang a
shingle in the name of tax season.  They are not sufficiently trained in
these matters.

Dan Johnson, CPA
504-722-8065
dan at danjohnsoncpa.com