8719 / What special rules apply to taxpayers who suffer casualty losses within a federally-declared disaster area?
Editor’s Note: The 2017 tax reform legislation suspended the generally available deduction for casualty and theft losses for 2018-2025, with the exception of losses sustained in a federally declared disaster zone. See Q 8720 for a discussion of the special relief created for victims of qualified 2016 disasters.
In recognition of the fact that taxpayers who sustain casualty losses as a result of disasters often have an immediate need for relief, the IRC contains provisions that accelerate the recognition of tax benefits to which disaster victims are entitled.
As such, disaster victims are entitled to claim casualty losses on their tax returns for the year before the disaster actually occurred.1 This treatment is elective, so the taxpayer may choose to claim the casualty loss in the manner otherwise prescribed by IRC Section 165 (see Q 8716).
Planning Point: An election to claim a deduction for the preceding year must be made by filing a return, an amended return, or a claim for refund clearly showing that the election has been made. In general, the return or claim should specify the date or dates of the disaster which gave rise to the loss, and the city, town, county, and state in which the property which was damaged or destroyed was located at the time of the disaster. An election for a loss resulting from a particular disaster occurring after December 31, 1971, must be made by the later of (1) the due date for filing the income tax return (without regard to any filing extensions) for the year in which the disaster actually occurred, or (2) the due date for filing the return (determined with regard to any filing extension) for the taxable year immediately preceding the year in which the disaster actually occurred. The election is irrevocable 90 days after the date on which it’s made.2
If the due date (including extensions) for filing the taxpayer’s prior year tax return has not expired, the taxpayer can claim the deduction when the taxpayer files that return. If the due date has passed, the taxpayer can file an amended return to reflect the casualty loss deduction on the prior year’s tax return.3