When Texas froze in February, I learned a couple of things: i) snow storms have names, and ii) people in my neighborhood aren’t great at covering plants. Those poor sago palms never had a chance.
Compared to the damages to homes and burst pipes throughout the state, clearing out the flower beds after Winter Storm Uri may be just a minor inconvenience, but there was a lot of dead foliage that needed to be replaced and removed all over Texas. Taxpayers should remember that those storm-induced landscaping expenses could qualify for a casualty loss deduction on their income tax returns. Because special tax rules apply to federally declared disaster area losses, potential deductions for property owners include the cost of removing the damaged plants, measures taken to preserve the shrubbery and any replanting costs necessary to restore the property to its approximate value before the casualty.
Disaster Loss
A disaster loss is defined as a loss that is attributable to a federally declared disaster pursuant to a Presidential declaration. President Biden’s declaration of a Federal Disaster in Texas, Oklahoma and Louisiana due to Winter Storm Uri allows residents of these states the ability to claim casualty losses on their tax returns. Taxpayers have the option of taking this deduction in 2020 if they have not yet filed their return for the year, or in the upcoming 2021 tax return. These qualified disaster losses can be taken without itemizing any other deductions; the qualified disaster related loss is simply added to the standard deduction. Additionally, the losses do not have to exceed 10 percent of the taxpayer’s adjusted gross income before qualifying taxpayers to take the loss.
Calculating the Loss
The amount of the loss is generally determined using the fair market reduction in value of the property due to the damage caused by the storm, calculated as the difference of the value immediately before the disaster event and the value immediately after. Depending on the amount of the loss claimed, taxpayers can use the following methods to calculate their deduction:
- De minimis. For losses under $5,000 taxpayers can use a good faith estimate of the cost required to restore the property to its condition immediately before the storm;
- Estimated cost repair method. For losses under $20,000, taxpayers can use the lesser of two repair estimates prepared by separate and independently licensed contractors that itemize the costs to restore the landscaping;
- Insurance method. Taxpayers can use the reports prepared by their homeowners or flood insurance companies if the reports set forth the estimated loss sustained from the damage;
- Disaster loan appraisal. Taxpayers may use an appraisal prepared to obtain a federal loan to identify the estimated loss; and
- Contractor safe harbor. Taxpayers may use the price specified in a contract prepared by an independent and licensed contractor to determine the decrease in fair market value of the personal use residential real property.
Taxpayers should remember to reduce the loss by the amount of any insurance proceeds, reimbursements, grants or other compensation received.
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