Source: http://www.accountantfordisasterrecovery.com/2013/01/
Timestamp: 2019-04-23 14:53:32+00:00

Document:
The IRS has addressed some thorny issues related to disaster casualty losses in a quick manner using the concept of “FAQa” or Frequently Asked Questions.
This web URL is the current one at this time (January 2013). It changed recently.
Some of these FAQs are very useful and many clear up issues related to small groups of taxpayers that are sometimes overlooked as the audience is small.
The titles in bolded RED at the top of each question are additions supplied by the author of the blog.
· The decline in fair market value of the property as measured immediately before and after the casualty (reduced by any insurance reimbursement).
(6/1/07) Q: Section 1.165-7(b)(1)(i) indicates the decrease in fair market value is the difference between the property's value immediately before and immediately after the casualty. What constitutes "immediately after"?
A: To compute the deductible casualty loss, taxpayers need to determine: (1) the difference between the fair market value immediately before and immediately after the casualty; and (2) the adjusted basis of the property (usually the cost of the property and improvements). Taxpayers may deduct the smaller of these two amounts minus insurance or any other form of compensation received or expected to be received. One method of determining the decrease in fair market value is an appraisal. An appraisal must reflect only the physical damage to the property and not a general decline in the property's fair market value. See §1.165-7(a)(2)(i) of the Income Tax Regulations. Taxpayers may also use the cost to repair or clean up the property (cost-of-repairs method) to determine the decrease in fair market value caused by the casualty. See §1.165-7(a)(2)(ii).
Although the regulations use the term "immediately after" when referring to the post-casualty value, we recognize that taxpayers' ability to determine the decrease in the fair market values of their properties, as a result of a disaster, may be restricted by lack of access to the properties and the need to remove water from flooded properties. Under these circumstances, the decrease in fair market value would take into account additional damage sustained to the property as a result of delays due to legal and physical restrictions to taxpayers' access to their property and the need to remove standing water from the properties.
(03/09) Q: If a taxpayer owns several parcels of real estate that are damaged by a federally declared disaster, may the taxpayer elect under §165(i) to claim a casualty loss on one property in the prior year and a casualty loss on other property in the current year?
A: If a taxpayer elects under §165(i) to deduct in the prior tax year losses attributable to a federally declared disaster, the taxpayer must report all related losses that qualify for the election on the prior year tax return (original or amended). See §1.165-11(d) of the Income Tax Regulations.
However, if the individual members of the homeowners association own the common elements as tenants in common, the individual members may be entitled to casualty loss deductions in proportion to each member's interest in the damaged common elements.
To compute the amount of a casualty loss, a taxpayer must determine the fair market value of the property both immediately before and immediately after the casualty and compare the decrease in fair market value with the adjusted basis in the property. From the smaller of these two amounts, a taxpayer must subtract any insurance or other form of compensation they have received or reasonably expect to receive. Fair market value may be determined by an appraisal. The cost to repair or clean up the property (cost-of-repairs method) may also be used as a measure of the decrease in fair market value caused by the casualty if the repairs are actually made, are not excessive, are necessary to bring the property back to its condition before the casualty, take care of the damage only, and do not cause the property to be worth more than before the casualty. See Regulations §1.165-7(a)(2).
If the members own the common elements damaged by the casualty as tenants in common, they are entitled to a casualty loss deduction for the lesser of: (1) the decline in value of their ownership interest as a result of the casualty or (2) their adjusted basis. From the smaller amount, the member should subtract any insurance or other form of compensation received or expected to be received. With respect to a member claiming the special assessment as a casualty loss, a member could use the amount of the assessment as a measure of the decrease in the fair market value of the common elements caused by the casualty as long as the amount of the assessment is commensurate with the member's ownership interest in the common elements and the requirements for using the cost-of-repairs method of valuation, described above, are satisfied.
1. Determine your adjusted basis in the entire residential property before the casualty. Your basis is generally the cost of the property, adjusted for improvements and certain other events. For more information on determining your adjusted basis, see Publication 530, Tax information for First-Time Homeowners, and Publication 551, Basis of Assets.
2. Determine the decrease in fair market value of the entire residential property as a result of the casualty.
3. From the smaller of these two amounts, subtract insurance and any other form of compensation received or expected to be received.
(6/1/07) Q: A taxpayer's residence is damaged by a disaster. Prior to the disaster the taxpayer's basis in the property was $100,000. The taxpayer receives insurance proceeds of $10,000 for the damage (not for living expenses), but only spends $7,500 for repairs necessary to restore the residence to its condition before the hurricane. The taxpayer receives no other form of compensation for the damage. Does the taxpayer have a casualty loss deduction? Is the difference of $2,500 between the insurance recovery and the repair cost taxable? What is the adjusted basis of the residence after the repairs?
1. Determine the adjusted basis in the property before the casualty.
2. Determine the decrease in fair market value of the property as a result of the casualty (generally by appraisal or using the cost-of-repairs method).
See Publication 547, Casualties, Disasters, and Thefts. In this case, using the cost-of-repairs method to measure the decrease in value caused by the hurricane, the taxpayer sustained a casualty loss of $7,500—the lesser of the $100,000 basis in the residence and the $7,500 cost of repairs. However, since the $10,000 in insurance exceeds the casualty loss, the taxpayer may not claim a casualty loss deduction on the taxpayer's federal income tax return.
The mere fact that the insurance proceeds exceed the cost of repairs does not in and of itself result in taxable income to the taxpayer. Any gain from a casualty is determined by the amount of insurance proceeds and any other form of compensation received or expected to be received in excess of the amount of the taxpayer's adjusted basis in the damaged property prior to the casualty. In this example, the taxpayer would not recognize any gain because the amount of the insurance proceeds is less than the taxpayer's pre-disaster basis in the residence.
(6/1/07) Q: How will the IRS handle water damage "mold issues" as a result of insufficient repairs or whatever the cause. Will there be special reporting on the loss related to mold?
A: Whether individuals may claim damage to their personal-use property from mold as part of a casualty loss depends on the facts and circumstances of each situation. A key factor to consider is whether the mold damage occurred as a direct result of the disaster or from some other intervening cause since there must be a causal connection between the casualty event and the loss claimed by the taxpayer. For example, individuals would not be entitled to deduct as part of their casualty loss mold damage that occurred as a result of insufficient repairs. The individuals' casualty loss deduction would be limited to the property damage caused by the disaster. In addition, if a large amount of time lapsed between the date of the hurricanes and the formation of the mold, this raises the question of whether the mold damage was caused by the disaster or by some other factor.
The formation of mold may qualify as a separate casualty. A casualty is an event that is identifiable, damaging to property, and sudden, unexpected, and unusual in nature. An event is sudden if it is swift and precipitous, and not gradual or due to progressive deterioration of property through a steadily operating cause. An event is unexpected if it is unanticipated and it occurs without the intent of the one who suffers the loss. An event is unusual if it is extraordinary and nonrecurring, one that does not commonly occur during the activity in which the taxpayer was engaged when the destruction or damage occurred and one that does not commonly occur in the ordinary course of day-to-day living of the taxpayer. If, under a particular set of facts, the formation of mold is a sudden, unexpected, unusual and identifiable event that caused damage to the individual's property, then it would qualify as a casualty and the individual may be entitled to deduct the loss for the resulting property damage as a casualty loss under section 165(c)(3) if the individual satisfies the other requirements for the deduction.
A: If the business property was damaged but not totally destroyed, the casualty loss is measured by the lesser of the adjusted basis or the decrease in fair market value, minus any other form of compensation (such as insurance reimbursement). Section 1.165-7(a)(2) of the Income Tax Regulations provides two methods for taxpayers to determine the decrease in fair market value of the property affected by a casualty. The first method is an appraisal. An appraisal must reflect only the physical damage to the property and not a general decline in the property’s fair market value. See §1.165-7(a)(2)(i). The second method is the cost to repair the property. See §1.165-7(a)(2)(ii). The cost to repair the damaged property may be used as evidence of the decrease in value if the taxpayer makes the repairs and shows that the repairs: a. are necessary to bring the property back to its condition before the casualty; b. the amount spent for repairs is not excessive; c. the repairs take care of the damage only; and d. the value of the property after the repairs is not, as a result of the repairs, more than the value of the property before the casualty.
Since the property is used in a trade or business, the casualty loss deduction must be computed based on each single identifiable property based on §1.165-7(b)(2)(i). Therefore, the taxpayer must compute the loss deduction with respect to the building separately. If the taxpayer satisfies all of the requirements for the cost of repairs method, then the casualty loss would be measured by comparing the decrease in fair market value (as evidenced by the cost of repairs) to the adjusted basis of the building. The casualty loss with respect to the building would be the lesser of the decrease in fair market value of the building or the adjusted basis of the building, reduced by insurance compensation. The deductible casualty loss for the building would be $20,000, computed by using $30,000, which is the lesser of the decrease in fair market value of the building ($85,000) (we are assuming that the $85,000 reflects only the cost to repair the building) or the adjusted basis of the building ($30,000) and subtracting from $30,000 the insurance payment of $10,000 (assuming that the $10,000 insurance compensation covered the loss of the building only).
· What is the taxpayer’s basis in the building?
· If the taxpayer repairs the partially destroyed building, how do the repair costs affect the computation of the taxpayer’s basis in the building?
· What is the authority for the basis information described above?
Response: Sections 1012 and 1016 of the Internal Revenue Code.Section 1012 provides, generally, that the basis of property is its cost to the taxpayer. Section 1016 requires that proper adjustment be made to the basis of property for expenses, receipts, losses, or other items properly chargeable to capital account.
IRS DOES NOT HAVE AN AUDIT GUIDE FOR PREPARING FOR AN AUDIT!
(12/15/09) Q. Previously, taxpayers who were affected by a federally declared disaster were instructed to write, in red ink, at the top of the Form 1040, information that identifies the particular disaster. Today, many taxpayers file electronically. Taxpayers who file electronically cannot enter information in “red ink” on the Form 1040. Is it acceptable that taxpayers who file electronically identify the disaster in “black ink” at the top of the Form 1040?
A: It is acceptable to put a statement in black ink at the top of the Form 1040. However, the Federal Emergency Management Agency (FEMA) notifies the IRS of the counties affected by a federally declared disaster. By entering the FEMA-supplied information into its computers, the IRS can systemically identify affected taxpayers. Only those affected taxpayers who are required to self identify (because their principal residence is not located in the covered disaster area) are required to enter information identifying the disaster on the Form 1040.
(12/15/09) Q. Taxpayer's beach front rental property was totally destroyed as a result of a hurricane that occurred in 2008. The taxpayer then decided not to rebuild. After the hurricane, the County Tax Assessor valued the property at $100. The taxpayer received insurance proceeds in 2009 that resulted in a gain. The taxpayer, who had been reporting income and expenses on Schedule E, has suspended losses. Is the taxpayer required to report the gain in 2008 or 2009? Is the taxpayer required to consider the property as disposed of and take the suspended losses? If so, are these losses reported on the 2008 or 2009 return?
A: The gain that results from the casualty must be reported in the year in which the insurance proceeds were received. Therefore, in the example above, the taxpayer should report the gain in 2009. See IRS Notice 90-21, 1990-1 C.B. 332. Pursuant to section 469(g) of the Code, losses are allowed, without limitation, if the taxpayer disposes of the entire interest in the activity to an unrelated person in a fully taxable transaction. Generally, this rule does not apply unless the taxpayer disposes of all of the assets used in the activity (including land). Because the taxpayer in the example above has not disposed of the land, the taxpayer may only take passive activity losses up to the amount of the taxpayer's passive income in 2008. Any suspended losses not allowed would carryover to 2009.

References: §1
 §1
 §165
 §165
 §1
 §1
 §1
 §1
 §1