Claiming Tax Deductions for Property Damage

Monterey County residents who experienced property damage during the severe winter storms of 2023 may be eligible for a Qualified Disaster Losses deduction on their tax return.

Last winter, powerful atmospheric storms swept through Monterey County bringing heavy rain, gusty winds, flooding, fallen trees, and mudslides. Due to widespread damage caused by these storms, Monterey County was among several counties added to the Major Federal Disaster Declaration by President Biden. As a result, if you experienced storm damage, you may be eligible to deduct part of the related cost of your damage on your tax return.

Note that losses from events NOT federally-declared as a disaster will not be eligible for a deduction from tax years 2018-2025. After 2025, the rules will be up for discussion again.

Deduction Rules

You are eligible to claim an itemized deduction for a personal casualty loss not covered by insurance, provided that you meet the special IRS rules.

1. The loss must be caused by a federally declared disaster.
2. Losses must first be reduced by $100.
3. After reducing your losses by $100, your deductible loss is limited to the amount greater than 10% of your adjusted gross income (AGI).

For example, high-speed winds caused a tree to fall and crush the roof of your home. Heavy rain and flooding destroyed your furniture and personal car. All of the unreimbursed losses total $100,000. If your AGI for the year is $150,000, your itemized deduction will be $84,900 ($100,000 minus $100 minus 10% of $150,000). You would get no deduction if your loss was $15,100 or less ($100 plus 10% of $150,000).

Pay Attention to Advantageous Timing

A Qualified Disaster Loss may be claimed on your tax return either for the year in which the disaster event occurred or the year immediately preceding the disaster event. Monterey County was added to the Presidential Disaster Declaration on January 17th, 2023. As long as your property damage took place in 2023 and was due to the storm, the IRS allows Monterey County residents to claim the deduction for 2023 OR 2022, whichever would be more advantageous to your tax situation. An amended return can be filed to claim the Qualified Disaster Loss on your 2022 tax return.

Beware of Gains from Insurance Proceeds

If you received proceeds from an insurance policy for your Qualified Disaster Losses, be aware that you may be exposed to incurring a taxable gain instead of deducting a casualty loss. This situation can happen when you receive a reimbursement from your insurance policy for property damages greater than the tax basis of your damaged property. Also known as an “Involuntary Conversion,” certain rules apply to homeowners who receive an insurance reimbursement for damaged property and depending on your situation, you may qualify for a special election, a primary residence exclusion, or an exception to the rule.

For more information on Federally Declared Disaster losses, see “Qualified Disaster Loss” in IRS Pub 147.

Like many IRS programs, the federal tax implications of claiming a Disaster-related Loss can be complicated. If you were a victim of the winter storms that ravaged Monterey County in 2023, consider consulting your tax preparer to help navigate the rules and special exceptions, and you may find an opportunity to capitalize on tax savings.

The information provided herein is for educational purposes only, and should not be construed as advice, including, but not limited to tax, legal, insurance, investment, or retirement advice. For your specific planning needs, please seek the advice of Integris Wealth Management, your tax accountant, attorney, insurance agent, or other professional as appropriate. Investing involves the risk of loss.