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Uninsured losses may be tax gains

Part 8 in an annual 12-part series on realty tax tips.

Did you suffer an uninsured loss for a "sudden, unusual or unexpected" event in 1993? Examples include fires, floods, earthquakes, hurricanes, tornadoes, accidents, thefts, broken water pipes, windstorms, hail and vandalism.

If you qualify, Uncle Sam wants to help pay for your uninsured loss by giving you an extra tax deduction.

Last year, 1993, was a big year for casualty loss damage, especially fires and floods. Because the 1994 Los Angeles earthquake was a declared disaster, affected taxpayers can deduct their uninsured losses on either their 1993 or 1994 income tax returns.

A tax deductible casualty loss is defined as one caused by a sudden, unexpected, or unusual event, such as the examples listed above.

If you have insurance, the tax law requires filing a claim with your insurer even if your insurance premium might go up, but any portion of your qualifying loss which is not paid by insurance may be a tax deductible casualty loss.

For example, suppose your home was damaged in the 1993 Midwest floods and you did not have flood insurance. Since that event was sudden, unexpected or unusual, the damage qualifies as a tax deductible casualty loss.

If insurance didn't pay for any of your loss, it is fully tax deductible (subject to limitations explained below), but, if insurance paid for part of your loss, only the unpaid remainder is a casualty loss.

Under the 1993 Clinton Tax Law, individuals in a federal disaster area can now take up to four years (instead of the previous two years) to reinvest insurance proceeds in a replacement home without paying tax on the insurance money.

Insurance money received for damaged personal property is not taxed even if the items are not replaced.

Unfortunately, a personal casualty loss is tax deductible only for the portion which exceeds 10 percent of your adjusted gross income. Also, the first $100 of each personal casualty loss is non-deductible.

To illustrate, suppose your home suffered $50,000 uninsured damage in the 1994 Los Angeles earthquake.

If your adjusted gross income for 1993 was $60,000 and you elect to claim your uninsured casualty loss on your 1993 tax returns, the first $100 is not deductible and neither is the first $6,000, but the remaining $43,900 is fully deductible.

However, if this loss occurred at your business property, the full $50,000 is deductible on your business tax return.

Most casualty loss deductions are not from major widespread losses such as floods, fires and earthquakes.

Instead, they are from individual casualty losses, such as water pipe breakage, accidents and thefts.

However, if the loss occurred slowly, such as termite damage, carpet beetle damage, well contamination, rust, erosion, and dry rot, the loss is not tax deductible.

The reason is that the damage occurred too slowly. It was not "sudden, unexpected or unusual."

Based on its experience that taxpayers tend to overstate casualty losses, the IRS loves to audit casualty loss tax deductions.

Be prepared with evidence of your loss, such as a police report, appraisal, repair bill, receipt, insurance settlement, photo and other documentation.

The IRS knows casualty loss audits are very profitable sources of additional tax dollars, so be ready with facts, not opinions, of your actual loss.

There is no dollar limit to your personal casualty loss, other than the 10 percent of adjusted gross income and $100 per event exclusions, but you must be able to prove the loss.

Repair bills are the best loss evidence. Expert appraisals are also excellent to prove before and after market value, but your deductible casualty loss cannot exceed your adjusted cost basis for the asset.

To illustrate, suppose your home was flooded and made worthless in the 1993 Midwest flood. It was worth $100,000 when it was destroyed but you only paid $35,000 when you bought it many years ago.

Your casualty loss would be limited to $35,000, minus 10 percent of your 1993 adjusted gross income, minus the land value, minus the $100 floor per event.

But your additional casualty loss deductions can include indirect expenses, such as temporary housing, moving expenses, property protection costs, legal fees and even crop damage.

If your uninsured casualty loss deduction exceeds your 1993 taxable income, you can carry back an excess loss to 1990, 1991 and 1992 to claim a tax refund.

Any unused loss can then be carried forward up to 15 years until it is completely offset by your taxable income.

Use IRS Form 4694 to claim your casualty loss, which will then be itemized on Schedule A of your tax returns.

Your tax adviser can assist with maximizing your casualty loss deduction.

Next: the Clinton tax law's new passive loss rules for realty investors.

Robert J. Bruss is a nationally syndicated columnist on real estate. Write to him in care of the Tribune Media Syndicate, c/o the Times, 64 E Concord St., Orlando, FL 32801. Questions of general interest will be answered in the column. Because of the volume of mail, personal answers to questions are impossible.