Tax Relief in Disaster Situations ( General Provisions)

1. Tax Relief in Disaster Situations (General Provisions) South Lake Tahoe, CA March 29, 2008

2. Presented by Derek Ganter Senior Stakeholder Liaison Office: 213 576-3399 Fax: 213 576-4154 E-mail: Derek.C.Ganter@irs.gov

3. Casualty Determination A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

4. Casualty Determination (cont’d) • A sudden event is one that is swift, not gradual or progressive. • An unexpected event is one that is ordinarily unanticipated and unintended. • An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.

5. Casualty Loss Proof Information needed to support the loss: • The type of casualty (car accident, fire, storm, etc.) and when it occurred • The loss was a direct result of the casualty • You were the owner of the property, or if a lessee, you were contractually liable for the damage

6. Casualty Loss Proof (cont’d) • Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. • Documented evidence to support the claimed allowable loss.

7. To Prove a Loss Records may have to be reconstructed. • For tips on reconstructing your records http://www.irs.gov/newsroom/article/0,,id=152317,00.htm • The information gathered will be used for tax purposes, as well as insurance reimbursement.

8. Reconstruction of Records • Inventories – get copies of invoices from suppliers (invoices should date back at least one year). • Income – get copies of bank statements • Obtain copies of last years business returns (IRS, FTB, EDD and business license). The county or city will reflect gross sales for a given time period. • Furniture & Fixtures – prepare a diagram or floor plan of the business location including equipment, where inventories were located as well as the outside area of the location. • Furniture, fixtures and vehicles – check with your insurance agent for list of furniture, fixtures, etc.

9. Tax Records • Immediately after the casualty file Form 4506 to request copies of the previous four years’ income tax returns. • If you are in a federally declared disaster write “DISASTER” in red across the top of the form to expedite process. • Normally fees to get previous years’ returns are waived for major disasters. • Copies of tax returns may also be obtained from your local IRS counters, in emergency and disaster situations.

10. Initial Activities After Event • Be sure to take photographs as quickly as possible after the casualty to establish the extent of damage. • Contact the title company, escrow company or bank that handled the purchase for copies of the escrow papers. • Use your current tax statement for land vs. building ratios, if available, if not available contact the county assessor’s office. • Check with a local appraisal or real estate companies for a “comps”, comparable sales to determine the fair market value within the same neighborhood.

11. Improvements to Your Home • Get written accounts from friends and relatives who saw the house before and after any improvements. • See if friends and relatives have photos. • If a loan was obtained for improvements, contact the institution for documentation to help reconstruct the cost of improvements. • Inherited Property, check court records for prorate values. • Check with the county assessors office for old records about the property. • Copy of the deed for the property

12. Improvements (cont.) • If the home was built, contact the contractor to see if records are available. • Insurance: most policies list a value of the building to establish a base figure for replacement value insurance.

13. Vehicles • Kelly Blue Book • Contact dealer for a copy of the contract, if not available give the dealer facts about the vehicle for a comparable price figure • Use newspaper ads for the period in which the vehicle was purchased to determine the cost. • For reconstruction of vehicle mileage contact your dealer or repair location for repair records.

14. Personal Property • Reconstruct a diagram or floor plan of the home, including where furniture was placed. Also include any bookcases, where pictures were located and shelves including personal items. • Reconstruction of fair market value; old catalogs (Sears, J.C. Penny etc.), local thrift stores, local news papers and library. • Go to a used book store with a diagram and information about your books, to possibly reconstruct the valve of books lost.

15. Losses To calculate loss: • Determine: • adjusted basis before disaster • decrease in fair market value (FMV) as a result of disaster • Subtract any insurance or other reimbursement received from the smaller of (a) or (b) above

16. Losses (cont’d) Casualty losses of personal-use property and employee property is reduced by: • $100 “deductible” per event for personal use property • 10% of AGI for personal use property • 2% of AGI if used for business by employee

17. Losses (cont’d) Casualty Losses - Adjustments to Basis • Decrease basis in property by • any insurance/other reimbursement, & • any deductible loss • Increase basis in property by • Amount you spend on repairs that prolong life of property, increase value, or adapt it to different use.

18. Other When to include insurance payments for living expenses in income: • Normally living expense payments from insurance in excess of the temporary increase in living expenses are taxable income & included on line 21 of Form 1040. • In the case of a Presidentially declared disaster, any payment to an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses is not taxable if it is not otherwise compensated for by insurance or otherwise.

19. Gains on Casualty If you receive an insurance payment or other reimbursement in excess of the adjusted basis of damaged or destroyed property you will have a gain. Amount received (Adjusted basis) Gain

20. Gains on Casualty (cont’d) If your main home is destroyed and the insurance proceeds result in a gain: • You can treat this as a sale of residence subject to the same rules. • The maximum gain exclusion will apply if, as of the date the home was destroyed, the taxpayer, during the 5 year period before the home was destroyed: • Owned and occupied the home for at least 2 years; • Had not, within 2 years previously sold or exchanged another principal residence upon which gain was excluded.

21. Gains on Casualty (cont’d) • A reduced maximum gain exclusion will apply if, as of the date the home was destroyed, the taxpayer • Had not owned the home for 2 years; • Had not occupied the home as a principal residence for 2 years; or • Had within 2 years previously sold or exchanged another principal residence.

22. Reporting Casualty Gains/Losses Personal-use property: • Losses go on Form 4684 and carry to Schedule A Itemized Deductions • Gains go on Form 4684 and carry to Schedule D Capital Gains/Losses

23. Reporting Casualty Gains/Losses Business and income producing property: • Gains and losses are reported on Form 4684 and are then carried to various other forms • Expenses for business use of home are reported on Form 8829 • Gains and Losses on other business property are reported on Form 4797

24. Reporting Casualty Gains/Losses (cont’d) Rental properties: • Report on Form 4684 and then on Form 4797 • Have 2 years from close of tax year when you realize the gain to replace property and defer gain • Casualty/theft losses are generally not limited by Form 8582 (passive losses)

25. Reporting Casualty Gains/Losses (cont’d) Insurance reimbursement after deducting loss: • If less than expected (and accounted for on casualty loss) include difference as loss on return for year when you can reasonably say you’re not getting any more money.

26. Reporting Casualty Gains/Losses (cont’d) Insurance reimbursement after filing: • If greater than expected (and accounted for on casualty loss) include difference as income in the year received.

27. Disaster Loss Publications IRS Disaster Losses Kits contain publications, forms, and worksheets that are helpful in reporting casualty losses: • Publication 2194 - For Individuals • Publication 2194B - For Businesses

28. Questions??? Taxpayer Education & CommunicationRecord Reconstruction