Taxpayers that have sustained property damage (for example, damage to homes and vehicles) as a result of Hurricane Harvey may be entitled to deduct the amount of such casualty loss against their income for federal income tax purposes to the extent not otherwise covered by insurance or other reimbursement. As many homes and businesses affected by Hurricane Harvey were not covered by flood insurance, the casualty deduction will likely be available to many taxpayers. As a result of the deduction, taxpayers may be able to use cash that had otherwise been set aside to pay taxes to repair their homes and replace their property.

The deductible loss will be limited in the case of personal property to the lesser of:

  1. the original acquisition cost of the property (plus any improvements made thereon), or
  2. the loss in value of the property as a result of the damage.

Such loss will be further reduced by insurance payments and other reimbursement, if any, casualty gains and 10% of the taxpayer’s net income for the year claimed.  Further details on the calculation of such deductions can be found by using IRS Form 4684, Casualties and Thefts.

To the extent the casualty loss relates to a FEMA declared disaster area, as unfortunately is the case with the majority of counties impacted by Hurricane Harvey, such losses may be deducted on the federal income tax return for the immediately preceding tax year, thereby providing cash refunds on an expedited basis to be used to cover expenses (for example, a 2017 disaster loss could be deducted against 2016 income when such return is filed or amended).

For more information, contact Nate Smithson.