Get Tax Relief After a Natural Disaster, Theft

When damage occurs, here's what homeowners need to know to start over.

It can be tough to pick up the pieces after you lose your home or property. Luckily, there are tax benefits that can help you get back on your feet after a casualty or theft.

A casualty occurs when your home is lost or damaged in a natural disaster or a sudden, unusual event. Losses caused by the following events are covered:

  • Car accident (if not caused by your negligence)
  • Storms and aftermath (including hurricanes, tornadoes, flooding)
  • Fires (as long as the fire is not arson)
  • Mine cave-ins or shipwrecks
  • Terrorist attacks
  • Volcanic eruptions
  • Vandalism

A theft is when someone steals your property and includes:

  • Blackmail
  • Burglary
  • Embezzlement
  • Extortion
  • Kidnapping for ransom
  • Larceny
  • Robbery

To claim tax relief after a casualty or theft, you must provide proof of loss. You must prove that your property was damaged from disaster or theft, and that you were the owner of the damaged assets. The IRS also needs to know whether you've filed an insurance claim to recover or repair your property, and whether you can reasonably expect your property to be found or fixed.

Now, figure the amount of your loss. Remember to consider the value of what was stolen or damaged rather than the replacement cost.

You can deduct any cost not covered by your homeowners' insurance, minus 10 percent of your income and a $100 deductible. You must report casualty losses in the year they happen.

Reimbursements from your insurance for losses aren't taxable, unless you come out ahead. If you get more money than the value of the property lost, report that as income on that year's taxes. If your home is in a presidentially declared disaster area, you can wait to report the gain if you spend the extra money to fix or replace your home.

Disaster Area Losses

Homes in presidentially declared disaster areas also get tax benefits in the following situations:

Home made unsafe by disaster. If the state or local government orders you to tear down your home, you can treat the loss in value as a casualty loss.

Tax-free land profits. If your home was completely destroyed by the Katrina, Rita or Wilma hurricanes, any profit you make from the sale of vacant land is tax deductible. A new law for 2007 gives you three years after the disasters to sell the land and claim the tax benefits. Sorry, if you have to sell your land at a loss, you can't deduct it on your return.

Federal disaster relief grants. If you get post-disaster relief grants, do not count them in your income if the payments are made to help you meet necessary expenses.

Federal loans canceled. The Robert T. Stafford Disaster Relief and Emergency Assistance Act may cancel your federal disaster loan. If your loan is canceled, you must reduce your casualty loss by that amount.

Postponed tax deadlines. The IRS may postpone tax deadlines for up to a year.

Always consult your tax adviser. Read more about casualty and theft loss in IRS Publication 547.

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