You can claim Harvey losses now!
Normally, you report income and losses in the tax year when they happened. For Harvey-related losses, it means on 2017 tax return which will be prepared in 2018. In other words, you have to wait until well into 2018 to receive the tax benefit from your losses.
Not for Harvey though! A little-know IRS rule allows you to claim losses from federally declared disasters in the previous year – as if they occurred a year earlier. This means that losses from Harvey can be included on your 2016 tax return. If you have not filed your 2016 tax return yet – hurry up, include Harvey losses, and you can get the IRS refund right away!
You can include Harvey losses on your 2016 tax return for an immediate refund!
What if you already filed your 2016 taxes?
You can still get your Harvey refund now! You need to file an “amended” 2016 tax return – meaning redo your 2016 tax return with Harvey losses included and send it to the IRS.
Amended returns require a special IRS Form 1040X, and refunds will take a little longer – but you can still get your money several months earlier! Do not wait! Our firm is busy preparing amended returns for many of our clients, and we can help you, too.
If your own home got flooded
This is a simplified example of how the IRS calculates your loss.
- Let’s assume your house was worth $150k before the Hurricane and $100k after it was damaged
- Subtracting these two numbers gives you $50k starting loss
- Suppose you receive $35k from FEMA: $30k for the damage to the house and $5k for temporary living expenses
- We ignore $5k and subtract $30k insurance reimbursement from the $50k loss
- The resulting $20k is your casualty loss before the “trim”
- The “trim” is 10% of your total income. If you make $70k in salary – the trim is $7k.
- Now subtract $7k from the $20k – and $13k is your tax-deductible loss.
The real calculation is more complicated than my example, so please either study the IRS Publication 547 or hire professional help, such as our firm.
Note: After Katrina, the 10% trim was temporarily suspended. It is possible that the IRS will create a similar break for Harvey. Stay tuned.
How do I figure out the property values before and after?
I’m glad you asked. I can suggest four different methods.
- Get a written opinion from a local Realtor. Caveat: the post-Harvey value drop cannot include the part due to the general decline for the area property values, only your particular property.
- Use county assessment as “before” value and subtract total damage as calculated by the insurance adjuster.
- Use county assessment as “before” value and subtract the cost of restoration per contractor’s bid.
- Use your best opinion as an experienced investor. The IRS may challenge your expertise though.
If you lost work or other income because of Harvey
I’m very sorry if this happened to you. However, there is no tax deduction for the lost income. It may sound unfair, but it is totally fair. You simply report less income for the year, and your taxes are automatically lowered.
If it did not make sense, then here’s an example. Best Buy has a 33% off sale on TVs. The TV that was $600 yesterday has a $400 tag today. Do you get to subtract 33% from $400? No. $400 is already discounted from $600.
Similarly, if your annual salary was normally $60,000 but Harvey killed your job, and there was no work for the last 4 months of the year – you only made $40,000. You “lost” $20,000 but it is not deducted from $40,000 – because $40,000 is already reduced from $60,000. You simply report $40,000 income, not $60,000.
If your rental property got flooded
The loss calculation is very similar to the calculation for your own home, but better: your do not have to worry about the 10% trim. There is more good news: unlike your usual operational losses, your Harvey losses will NOT be limited if your income is too high!
As you probably suspect, there are more IRS rules related to disaster losses in rental businesses. Ignore these rules, and you may leave money on the table – or trigger an IRS audit. This is why our clients leave this complexity to us.
Note: lost rent is NOT a tax deduction! See an example of lost salary above; it is the same concept.
If your unfinished flip got flooded
This is not an easy question. You can treat such losses in two different ways, and I cannot give you a rule of thumb.
The simple solution will be to wait until the flip is finished and sold. Your additional cleanup and construction costs will be eventually deducted from the sales price. If you want to speed up the tax benefits and go after a quick refund – then it is not a good DIY project. Let us do it for you correctly.
What about the cost of repairs?
Excellent question. As confusing as it sounds, repairs is a completely separate issue from casualty losses. On personal residences, repairs are not deductible. On rental properties you will still be able to deduct your repairs, but it will be the next year, on your 2017 tax return.
But my insurance claim is not final, and I will be fighting them!
Join the club. The IRS will allow you to file your tax return using either preliminary numbers or expected numbers, before you resolve your claim. If the final results end up different from the numbers you reported – you will have to make adjustments later on.
This is another situation where you may want to hire an expert like us.