A house fire is a tragedy, to the IRS it is a casualty loss.
The loss of a home due to fire is one of the most stressful events a person can go through. Fortunately, in a situation where the loss is substantial, the Internal Revenue Service has a specific definition for these events and a procedure which, when followed, will allow for the deduction of these casualty losses from your individual income tax returns. Not all of the loss will be allowed, however, so this procedure must be followed closely.
Form 4684 Preliminary Information
Find the Form 4684. This form is available for download from the IRS.gov website. The first piece of information you will need to enter is the description of the home lost. This would include the type of home whether it be a residential town home, condo, or free-standing home. The location asked for could either be the physical address or the legal description of the property on county tax records. You will also have to provide the date of purchase
.
The losses on this form are categorized by property lost per event. In other words, if your home was destroyed by the fire and your car was stolen the next day, each loss would require it's own Form 4684 as a different loss event. If multiple items are destroyed in the same loss, you may use the one form.
Figuring the Deductible Amount
You must find the cost or other basis of the home lost in the fire. This amount would be the original cost of the home added together with the costs of any improvements that were completed prior to the fire. The next figure you will need is the reimbursement, or potential reimbursement, from the insurance company for your losses. Some people may choose not to report the loss to their insurance company to prevent rate hikes or a loss of coverage. The anticipated reimbursement must be calculated whether a claim is filed or not. If the reimbursed amount is actually more than the cost and basis of the house, you have realized a gain that may be taxable as ordinary income.
Calculate the fair market value (FMV) of the house both prior to and after the fire. You may use an insurance adjuster or appraiser to find this total. The FMV after the fire is subtracted from the FMV before the fire to leave the total loss. Potential reimbursements are subtracted from this total to arrive at the actual casualty loss.
Adjustments to Casualty Loss Figure
Calculate the adjustments to the casualty loss to arrive at the deductible amount. From the total on line 10 of the Form 4684 subtract the $500 limitation. If the loss is less than that amount, you do not have enough for a casualty loss deduction. Using the workbook form, calculate the loss of all interior items lost in the fire going room by room in the workbook to arrive at a total loss amount. This would include furniture, jewelry, appliances, and heirlooms. It is best to do this within a reasonable time after the event so that the items in each room can be viewed and marked as destroyed for both insurance and tax purposes.
On line 20 of the main Form 4684, enter in 10 percent of your adjusted gross income found on the last line of the first page of the 1040 tax form. Subtract this ten percent from the total loss and that will be the amount you can claim on your tax return.
Tags: Form 4684, casualty loss, total loss, after fire, home lost, insurance company, lost fire
