[Homestead] Insurance coverage is not what you think is, or tax deductions either.
tvoivozd at infionline.net
Sat Aug 28 19:54:48 EDT 2004
And you probably haven't noticed, but the once common insurance for
replacement value of a damaged or destroyed house has largely
The New York Times
August 29, 2004
Insurance Fall Short? Uncle Sam Can Help
*By JAY ROMANO*
WHEN disaster strikes, a homeowner's property and casualty insurance may
not fully cover the loss — or it may not cover it at all. The coverage
may not be sufficient, and there is almost always a deductible. But
there is a way to get additional help — and the assistance is provided
by the federal government's tax laws.
In some cases, said Julian Block, a tax lawyer in Larchmont, N.Y., the
losses are deductible on the homeowner's federal income tax return.
(Damage paid for by insurance is of course not deductible.) Usually, Mr.
Block said, for a loss to be deductible it has to be the result of a
sudden or unexpected event, like a storm, a flood, an earthquake, a
tornado or a fire. And the loss is usually deductible only in the year
"There is a special rule for losses in places that have been declared a
federal disaster area by the president," he said, noting that such is
the case for a number of Florida counties hit by Hurricane Charley
earlier this month.
In those cases, homeowners have the option of taking the deduction on
their tax return either for the year the loss occurred or the previous
year. And the reason this could make a difference to a taxpayer, Mr.
Block said, has to do with the amount of the deduction allowed by the
All unreimbursed casualty losses are subject to two limitations. "Losses
are allowable only to the extent they exceed 10 percent of the
taxpayer's adjusted gross income," Mr. Block said, referring to the
amount listed on the last line of the first page of the taxpayer's 1040
tax return. "And the first $100 of each loss is not deductible."
If a taxpayer has an unreimbursed casualty loss of $20,000, and an
adjusted gross income of $100,000 for that year, the first $10,100 of
the loss would be nondeductible, leaving a deductible amount of $9,900.
But if the loss occurred in a federal disaster area, the deductible
amount might be different since the taxpayer can apply the loss to the
previous year's tax return.
If the taxpayer's adjusted gross income the year before the loss was
$75,000, then the first $7,600 of the claim would not be deductible,
leaving a deductible amount of $12,400. (The taxpayer would have to file
an amended return for the previous year.)
Joel E. Miller, a Queens tax lawyer, pointed out another caveat with
casualty loss deductions. "You have to figure out what your loss is,"
Mr. Miller said, explaining that the loss is defined as the lesser of
the home's "adjusted basis" or the "diminution in value" caused by the
Adjusted basis, he said, is basically the purchase price plus the costs
of the purchase (including closing costs) and any improvements to the
house. "The amount of the loss is not based on the current value of the
property," he said. So a $500,000 house that was bought for $250,000 a
decade ago would have an adjusted basis of $250,000 (not including
purchase costs and improvements.)
Diminution in value, he said, is the amount the disaster decreased the
current value of the property. So if a hurricane causes $300,000 in
damage to that $500,000 house, it would have a $300,000 diminution in
value. But since the loss is defined as the lesser of the two amounts,
the homeowner's casualty loss would be $250,000 — the adjusted basis —
which would then be subject to the $100 and 10 percent limitations.
"I tell people that filing for a casualty loss yourself is a little like
doing brain surgery," Mr. Block said. "It's safer to hire a professional."
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