IRS Casualty Claims: Handing Your Disaster Cleanup
We at Arcadia Art Consultancy are heartsick about the suffering caused by Hurricane Harvey. In light of this recent tragedy, we hope to provide some valuable and often forgotten information which may be able to help those who've been affected recoup considerable some of their losses.
Unfortunately, many of those hit hardest by these most recent hurricanes did not possess flood insurance, and the vast majority of hazard policies exclude floods as a recoverable loss event. Many Houstonians may have concluded that they are completely out of luck because they did not carry flood insurance. This is not necessarily true. Most Americans never take advantage of the deductible available to them under IRS regulations for losses due to casualty or theft and, as a result, they are unaware that they recoup a considerable sum.
This is how casualty deductions work. If you own personal property that was destroyed by a hurricane, you are entitled to deduct that loss against income to adjusted gross income limitations. What does that mean? Suppose you owned a painting for which you paid $25,500 that was substantially destroyed by flooding and for which you are entitled to no insurance reimbursement. Suppose further that your adjusted gross income is, say $150,000. Finally, also assume that the artwork's fair market value immediately before the flood had not fluctuated from your original cost basis, and that after the flood, its fair market value as a substantially-damaged painting is now just $1,000. under the IRS's deduction for casualties and losses, you are, in rough terms, allowed to take a deduction against income for your loss, calculated as follows:
Fair Market Value Before Casualty - Fair Market Value After Casualty = Loss Amount
Loss Amount - $100 Per Casualty Event = Gross Casualty Deduction
Gross Casualty Deduction - 10% of Adjusted Gross Income = Allowed Amount of Casualty or Loss Deduction
$24,400-(.10 x $150,000)=$8,400
Because your adjusted gross income is $150,000, you are in the 28% tax bracket. Therefore, your casualty and loss deduction saves your $2,380 in tax obligation (i.e. 28% of $8,500). If you chose to take advantage of the IRS' allowed deduction for casualty or loss, you MUST obtain a personal property appraisal by as USPAP compliant personal property appraiser to determine the fair market value of the damaged or lost property before and after the casualty event. This means that, when you are engaged in disaster cleaning, do not operate under the default mode that everything this ruined in your house should be immediately through away. If you suspect that your damaged property has significant fair market value before the loss, you should minimally take high-definition digital photographs of the items and store the object somewhere safely. Of course, to the extent possible, it is important to try and salvage your purchase records or other documents evidencing the cost, condition, and provenance of your damaged property. If you did not purchase your destroyed valuables but, say, inherited them, do not despair. Event though the IRS requires you to state your basis in lost property, rules exist that might allow you to calculate your basis in alternative ways, but you should consult your accountant for details.
If you are concerned that your deduction will not be valuable because you did not make enough money in 2017, there is good news. Because Hurricane Harvey will be regarded as a 'federal disaster,' you will be entitled to amend last year's return and claim your casualty loss deduction in 2016, which is great if you are likely to earn less in 2017 that your did in 2016. You should be aware that you may still claim a casualty or loss deduction even if you received some insurance compensation, but, not surprisingly, the government will require you to subtract such received payments against the gross amount of your casualty or loss deductions.
We at Arcadia Art Consultancy stand ready to support disaster survivors. We wish all affected by Hurricane Harvey a full and swift recovery.
If you are reading this and you are not yet effected by such a loss, please take the appropriate measures to create an inventory listing of all valuables in your home. If possible, consult an USPAP complaint personal property appraiser who can provide accurate cataloguing information, fair market values, detailed condition reporting, and photography to ensure that all items are properly compensated for by your insurance company, or the IRS.
The IRS will ONLY accept appraisals from personal property appraisers who are USPAP compliant. Many gallerists, dealers and other art world professionals falsely advertise 'appraisal services'. Do not be fooled, these will not be accepted! We highly recommend finding your appraiser (if it isn't us) through the International Society of Appraisers.
Have questions about your valuables, the IRS, or anything else? Contact us. We are here to help!