When natural disasters, such as Hurricanes Charley & Ivan, strike your home or business, the results can be devastating—especially if the losses aren’t fully covered by insurance or your insurance claim is contested.

Fortunately, you may be able to get help from Uncle Sam by claiming a casualty loss deduction on your tax return. If your region is officially designated as a Presidential Disaster Area (as parts of Florida were last week), you don’t even have to wait until you file your 2004 return. You may be able to amend your 2003 return and get a tax refund for fast financial relief.

Claiming the loss on an amended return means an earlier refund, but waiting to claim the loss on your 2004 return could result in a greater tax saving, depending on other factors such as income and deductions. If you choose to take the loss in 2004, you may want to reduce withholding or estimated tax payments.

What Qualifies for Tax Purposes?

To qualify for a casualty tax write-off, damage must be caused by a ”sudden, unexpected or unusual” event such as a hurricane, earthquake, tornado, fire or storm. Auto collisions and thefts can also qualify. (There is no deduction for damage caused by gradual deterioration, such as destruction caused by termites or drought.)

Assuming you are eligible, casualty or theft loss deductions for personal property are limited in two ways:

• You can’t deduct the first $100 of any casualty.
• You can only write off casualty losses when the total amount in one year (reduced by the $100 per casualty amount) exceeds 10 percent of your adjusted gross income). The amount of the loss for real estate is the difference between their property’s fair market value before and after the loss, reduced by any insurance proceeds, or adjusted basis if that is less.

Example: Let’s say your home was hit by a tornado and the damage is estimated at $200,000. But the insurance only covers $150,000. Your AGI is $100,000. After subtracting $100, your deductible loss is limited to $39,900 ($49,900 minus 10 percent of $100,000).

However, there are no limits on losses for business or income-producing property such as rental real estate. In other words, you can write off business losses without applying the 10 percent limit or the $100 per casualty amount applied to personal losses. So if your business suffered $50,000 of damage that was not reimbursed by insurance, the entire amount would be deductible (assuming your tax basis in the damaged assets was at least $50,000).

To claim a property loss, for tax and insurance purposes, you want to be able to prove that a disaster took place. Keep copies of newspaper clippings and police reports. Take photos or videos after a casualty. If you have any “before” and “after” pictures or videotapes, they can also help back up casualty loss claims.

In addition to this documentation, you may also have to substantiate the value of the real estate property loss by getting an independent appraisal from a real estate expert. (The cost of the appraisal and the cost of obtaining photographs or videos can be deducted as a miscellaneous expense.)

This article originally appeared at BizActions.com in August 2004.
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