When natural disasters occur, they often leave many people with severely damaged or destroyed homes and businesses. Some lose everything they own. If you are affected by a disaster that is declared by the President to qualify for federal assistance, there are several provisions in the tax law that may provide relief.
Extended tax deadline and interest abatement. The IRS is authorized to postpone the deadlines for filing returns and paying taxes for up to one year in a Presidentially declared disaster area. Also, the IRS will not charge interest that would otherwise accrue for the extension period.
Faster refund. Taxpayers suffering losses in a federal disaster area have a choice of which tax year to deduct the casualty loss. You may deduct it on the return for the year the loss occurs, or it can be claimed on your prior year’s tax return. Amending your prior year’s return may give you a refund of much-needed cash sooner than waiting to deduct the loss on your current year’s tax return.
Tax-free gain. If the insurance payments you receive exceed the tax basis of your property, you will end up with a casualty gain. Casualty gains in federal disaster areas receive special tax treatment. For example:
- Individuals may qualify for up to a $250,000 gain exclusion ($500,000 for married couples) on their principal residence. That’s because the destruction of the residence is treated as a “sale” for tax purposes.
- No gain is recognized on the insurance reimbursement for the contents of a building as long as those contents were not separately listed on the insurance policy.
- If you replace your property with similar property within four years, you may be able to avoid or postpone paying tax on any gain from your involuntary conversion.
If you suffer a casualty loss, call to discuss the best tax course of action in your situation.
Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.