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Losses in Disaster Areas That are Eligible for Federal Assistance

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Dec 5th 2017
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I’ve written several articles about legislation enacted in September that authorizes special tax breaks for qualifying individuals who suffer losses in disaster areas that are eligible for federal assistance.

This time around, let’s discuss some murky distinctions.

In some situations, a damaged residence might be in close proximity to a disaster area but not actually within the officially designated area. In that case, the deduction for a casualty loss can be claimed only on the return for the year of the loss and not on the return for the prior year. This is so even though the damage was attributable to the same event that resulted in an official designation for the neighboring area.

For example, in August 2004, Hurricane Charley initially came ashore in Florida at Sanibel Island, located in Lee County and just outside of Fort Myers. Then, it immediately ricocheted off Sanibel and moved into Port Charlotte, located in Charlotte County. While President Bush declared Charlotte County a disaster area, he didn’t do so for Lee County. Consequently, tax breaks for disaster losses were unavailable to Lee County property owners, though their losses might have been just as devastating as those suffered by their Charlotte County neighbors.

Outlays to Protect Against Casualty Losses

Long-standing rules deny deductions for preventive measures taken to avoid damage to property by floods, storms and the like. An example would be the cost of a dike to prevent flooding. The IRS considers the expenditure to be a permanent improvement that’s added to the cost of the property for purposes of determining gain or loss on a later sale.

Similarly, no deduction is allowed for the value of trees that are removed from residential property for fear that they’ll be brought down by the next storm, though a deduction is allowed if they’re felled by a storm.

Here’s another example: At Cade Austin’s residence, some of the pine trees had grown until they interfered with power lines to his dwelling. With Cade’s consent, the utility company had tree surgeons remove all the branches from the side of each tree close to the power lines. Since the absence of branches on one side of the trees might cause them to break or uproot during an ice storm and damage his residence, he had the utility company remove the trees completely.

Based on the way Cade read the tax code, he was entitled to a casualty-loss deduction for the resulting reduction in value of his property.

But the Tax Court thought otherwise. There was “no sudden and unexpected occurrence” — the usual requisite for the deduction. Moreover, noted the Court, if Cade could claim a casualty loss, so could someone who installs a burglar alarm or smoke detector in a residence.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 225 and counting).