With hurricane Florence coming ashore later this week, DBL thought it would be a good time to explain the new application of personal casualty loss under the Tax Cuts and Jobs Act (TCJA). A personal casualty loss is defined as those not incurred in a trade or business or in any transaction entered into for profit that arises from “fire, storm, shipwreck or other casualty, or theft.” The Rul. 79-174 defines “casualty” as an identifiable event of unexpected, sudden or unusual nature. To make it simple, hurricane Florence definitely fits the definition.
Section 165(h)(5) of TCJA really changes how personal casualty losses may be deducted after December 31, 2017, and before January 1, 2026. Here is the new rule. Taxpayers may continue to deduct person casualty losses, but only to the extent they are attributable to federally declared disasters. The definition of a “federally declared disaster” in Section 165(i)(5)(A) as one determined by the president to warrant federal assistance under the Stafford Act.”
That does not mean if your house is burglarized you cannot deduct the loss but there are significant limitations to the deduction. If the taxpayer’s personal casualty loss is not attributable to a federally declared disaster, the loss is limited to the extent of personal casualty gain (Section 165(h)(5)(B). This means if excess casualty gain exists after applying the loss from the casualty event the remaining gain can be deducted.
This is best explained with an example:
John and Jan’s house is burglarized and Jan’s $20,000 engagement ring is stolen. The ring was not insured. In the same tax year, a tree falls on their house which is covered by insurance. After all of the damage is repaired they have a $25,000 taxable gain from that loss.
With the above example, $5000.00 could be deducted under the new tax law.
Sign up for DBL’s How to take advantage of TCJA before it sunsets seminar on October 25 from 5 to 6:30 pm in our Vienna, VA office. 1.5 CLE credits pending. Space is limited!
Author: Rhonda A. Miller
Partner at Dunlap, Bennett & Ludwig’s Vienna Office.
Posted in: Estate Planning