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I have the dubious distincting of being in an area that saw both Katrina and Wilma last year. Katrina wasn't too bad when it hit Fort Lauderdale, but Wilma packed a mean punch. We had damage to one of our cars, and some damage to our townhouse. Screens were damaged, water blew around/through most of our windows (one was cracked), and as a result, some water damage to our wood floors. Now I'm trying to understand how to handle these casualty losses in preparing our tax return.

The car was covered by insurance, less a $500 deductible. This I understand can be claimed as a casualty loss, following an example in IRS Pub. 547.

The house is a bit more complicated. Insurance completely rejected our claim. Windows and screens aren't covered by our "condo" policy, yet our condo docs clearly state that those are our responsibility. The insurance company also rejected our claim for the floor damage (the adjuster foretold this when he came to handle our claim), saying the damage wasn't enough warrant replacement "at this time". I can document the floor damage with pictures showing darkening at the seams as well as swelling/lifting suggesting delamination of the layered plies.

As a result, we are in the process of obtaining estimates for window replacement, patio screen replacement, and wood flooring. All of this is very slow, as contractors are backed up for months with a backlog of work. We have every intention of doing the window and screen replacments ASAP, but we don't expect to have the money to mess with the floor right now. (Fortunately, everything dried out quickly and there are no mold issues to be concerned with.)

The question is, how do we go from these damages and estimates to determining a figure for my casualty loss. The IRS publications I have looked at talk about determining the change in FMV based on the damage. Obviously, my FMV has been affected, but quantifying that is difficult. The IRS suggets the possibility of getting an appraisal, but I don't have a "before" appraisal to compare to, even if I paid to have one done today.

The IRS also mentions the possibility of using repair estimates to approximate the FMV loss, but they say this is not always accurate. For example, the windows we put in might be higher quality than the old windows. If that increases the home value above the pre-damage value, the cost is not valid for establishing FMV loss. How is a mere mortal supposed to make these determinations?

One publication on casualty loss says that you can't use an estimate to approximate FMV loss if you don't make the repair. In the case of our floor, we're not doing it now, simply because we can't afford to. That doesn't negate the loss in FMV, it just means we have to live with it until we can do something about it. If I tried to sell the place tomorrow, a buyer would want to back off the cost of replacing the damaged flooring. That sound like I should be able to claim something as a loss, I just don't know what.

The window replacements also put us in an odd spot. One window was cracked, obviously from the storm. The others bowed from the wind pressure and leaked through the seams and tracks (these are horizontal sliders). I don't know if this problem existed before the storm, or was caused by the winds and flexing of the windows. It certainly never was an issue before the hurricane. Can I simply call the windows "damaged" and needing replacement because they no longer do their job of keeping the elements outside? Or, am I pushing things even thinking about deducting their replacement cost?

By my reading of the IRS guidelines, any damage that, if disclosed, affects the value of the house, can be taken as a casualty loss. The knowledge that the windows don't keep water out, if disclosed, has a real impact on the FMV of my home. By this logic, I think the windows should qualify for something.

Beyond our own damages, the building exterior sustained signficant damage to roof. Many tiles were broken or blown away, several landing on our car. We face a potentially significant loss assessment from the condo association to cover the cost of roof repairs. When that happens, would that also be deductible as a casualty loss? Or would the roof damage factor into my FMV loss on the value of my condo today (do I own a share of the roof?) How would one go about figuring this out?

This is not an insignificant amount of money we're talking about here, either. The total for our repairs and the assessment could easily total $20-$25k. I'd be very interested to hear what others would do in this situation.

One last thing....I understand there were some automatic deadline extensions granted for filings earlier this year. Is there anything automatically in place extending the April 15 personal filing deadline, or do I need to file my own extension if I need more time to determine my casualty losses?

Thanks in advance,

Jeff
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I also suggest posting on the Insurance board.
http://boards.fool.com/Messages.asp?bid=100156
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The car was covered by insurance, less a $500 deductible. This I understand can be claimed as a casualty loss, following an example in IRS Pub. 547.

Yes.

The question is, how do we go from these damages and estimates to determining a figure for my casualty loss. The IRS publications I have looked at talk about determining the change in FMV based on the damage. Obviously, my FMV has been affected, but quantifying that is difficult.

This is where accounting and taxes become less a science and more of an art. You gather evidence to support your opinion of the change in FMV and go with it. It feels a little funny when you're used to copying the income figures off of your W-2, but that's the way this part works.

The IRS suggets the possibility of getting an appraisal, but I don't have a "before" appraisal to compare to, even if I paid to have one done today.

Appraisal is also an art, not a science. Any decent appraiser would be able to come up with a FMV before the loss. That's not tough for them to do. You could probably get one appraiser to do both valuations for you if you really wanted to go that way.

The IRS also mentions the possibility of using repair estimates to approximate the FMV loss, but they say this is not always accurate. For example, the windows we put in might be higher quality than the old windows. If that increases the home value above the pre-damage value, the cost is not valid for establishing FMV loss. How is a mere mortal supposed to make these determinations?

Well, you could check out the cost of a more comparable window. Then look at the itemized repair bill (or estimate). The labor to install a window is probably going to be roughly the same no matter what quality window you install. It is the window itself that will differ in cost. So you could take the labor from your actual repair and add in the cost of a more comparable window.

One publication on casualty loss says that you can't use an estimate to approximate FMV loss if you don't make the repair.

Is that an IRS publication? Or someone's commentary? I'm not sure I agree with that opinion. Estimates are about ALL you're going to have to work with in this situation.

I don't know if this problem existed before the storm, or was caused by the winds and flexing of the windows. It certainly never was an issue before the hurricane. Can I simply call the windows "damaged" and needing replacement because they no longer do their job of keeping the elements outside? Or, am I pushing things even thinking about deducting their replacement cost?

On this one, I'd suggest looking at the current condition of the windows. Are they currently damaged from the hurricane wind? Or do they just leak when subjected to hurricane winds? If they're poor or mid- quality windows that just leak under those conditions, then they're probably not damaged. But if they are supposed to stand up to that kind of stress and didn't, then it sounds like they might be damaged. In either case, if they now don't keep out even a minor rain, then they probably are damaged. The key is connecting the damage to the hurricane.

We face a potentially significant loss assessment from the condo association to cover the cost of roof repairs. When that happens, would that also be deductible as a casualty loss?

That would be a casualty loss. And since the casualty was the storm(s) that occured in 2005, that is the proper year to claim the casualty loss. Keep that in mind when thinking about this issue. Technically, you have two casualties here. One hurricane (Katrina) in August, and another hurricane (Wilma) in October. (It was October, wasn't it?) But both of these casualties happened in 2005. So every loss that is related to these two storms is deducted in 2005.

It might take some time to determine the exact amount of your loss - your HOA loss assessment is an excellent example. The loss has already happened. All that's left is determining exactly how big that loss is. If your HOA gets a bigger settlement from their insurance carrier, your loss is smaller. If they don't get as much, your loss is bigger. You know - or are fairly certain - that the loss assessment is coming. You just don't know how much it is yet.

For this particular item, you've got a couple of practical choices. You could estimate the assessment, include that on your 2005 return, and then file an amended return, if necessary, once the actual assessment is known. Or you could file an extension and wait on filing your return until you get the actual number. But if that wait takes you to October 15 (the extended tax deadline), then you're forced back into the first option. At that point, you'd have to make an estimate, then amend your return at a later date.

Is there anything automatically in place extending the April 15 personal filing deadline, or do I need to file my own extension if I need more time to determine my casualty losses?

No. All of the automatic extension stuff for the 2005 hurricanes is over. You'll need to file an extension if you need one.

--Peter
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One additional comment.

Casualty losses which were incurred in Presidentially declared disaster areas for the 2005 hurricanes can be deducted on your 2004 (that's not a typo) tax return if that is more advantageous.

However, in order to do so, you must file the original or amended 2004 return by the due date (without extensions) for filing your 2005 tax return (either April 17 or April 18 depending on your filing center).

You can find full details in IRS Pub. 4492, Information for Taxpayers Affected by Hurrincanes Katrina, Rita and Wilma, www.irs.gov/pub/irs-pdf/p4492.pdf.

Ira
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Thanks Peter, your post was a tremendous help! Always good to know what someone in the business thinks...

I'm more science-minded, so this "art" of determining FMV is unnatural to me. I get the impression that the most important thing will be to document everything as much as possible so we can provide justification in the event of an audit.

Thanks again,
Jeff
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Peter,

First off, thanks for you help to all on this board. I, for one, greatly appreciate what you and the others do.

In regards to losses due to Hurricanes Katrina, et.al., I have a question concerning Landscaping.

A number of trees were damaged and destroyed. Since it is essentially impossible to replace a 75 foot Black Olive tree, how do you calculate the FMV? The trees available are nowhere near the size of the ones that were lost -- trees available for planting are much, much smaller. And *IF* they were available, the cost would be prohibitive (especially since a tree loss is not a covered peril).

Pub 547 says: "Replanting necessary to restore the property to its approximate value before the casualty" (page 4, 3rd column).

What to do in the event that is just not feasible? For example, to replace with a tree that size would cost ~10,000, but all that is available is one that costs ~2,000.
- Is there any increase to FMV available in just such a case?

Thanks in advance,

Joe
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What to do in the event that is just not feasible? For example, to replace with a tree that size would cost ~10,000, but all that is available is one that costs ~2,000.

From that, it sounds like the loss is $10k. Just because you can't exactly duplicate the tree doesn't mean you can't calculate the loss.

Another approach, and one the IRS might take if trying to challenge that valuation, would be to look at the FMV of the entire piece of real estate. What was the FMV of the whole property before the hurricane? And what was the FMV after? Did the loss of the trees have an impact on the value of the property? For some properties, they definitely would. For others, the value of the property might increase with the hurricane-assisted clearing of trees.

Like I said before, this area of taxes is much more art than science.

--Peter
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Peter,

Thanks for the quick answer.

<<What to do in the event that is just not feasible? For example, to replace with a tree that size would cost ~10,000, but all that is available is one that costs ~2,000.>>

<From that, it sounds like the loss is $10k. Just because you can't exactly duplicate the tree doesn't mean you can't calculate the loss.

Another approach, and one the IRS might take if trying to challenge that valuation, would be to look at the FMV of the entire piece of real estate. What was the FMV of the whole property before the hurricane? And what was the FMV after? Did the loss of the trees have an impact on the value of the property? For some properties, they definitely would. For others, the value of the property might increase with the hurricane-assisted clearing of trees.

Like I said before, this area of taxes is much more art than science.

--Peter
>

So a follow-up question begs ----

Do I have to spend the $10k in order to claim the casualty loss to my landscaping?

Reading Pub 547 it sure seems like you do.

Or, is this a case where the loss is just that: a loss? Whether one chooses to make themselves 'whole', or not, is not relevant to the deductability of said loss. {If such is the case, it seems to good to be true}

Trying to learn the Art,

Joe

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Joe,

My parents were in the unfortunate path of Ivan last year, and their property/landscaping was similarly decimated. Several months later they paid an arborist to come look at their home and help calculate the magnitude of their landscaping losses. They had well over 100 trees down, and most of their bushes and shrubs blown over. The arborist placed their losses somewhere north of $50k. I know it's a little late for Monday, but if you're filing an extension, this may be worth looking into.


Peter,

Based on your previous recommendations, I made it a point to get estimates for equivalent replacement windows/floors (even though we are upgrading some things when we do the work). I am documenting every step of calculating my loss in FMV, and taking notes as to my current thinking in how I arrived at the number I am claiming. I'm even putting a separate file with my taxes this year contianing pics, insurance correspondence, copies of estimates, etc. I want to have all of this information to refer back to in the event of an audit. My total figure for casualty loss is in the high 20s, much higher than I initially expected. Insurance told me to go suck a rock, since there is no open roof or wall breach....

Jeff
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Jeff,

Thanks for the info. Since I have gotten different answers, and since the IRS' own information is contradictory, I think that I will be using the services of a Professional for the first time in a long while.

I filed based upon a *conservative* estimate of the replacement costs for the trees. I will be getting three estimates from arborists/tree people for the work I want to have (and will have) done. With this information I will go to the CPAs/Tax Preparers we will be interviewing.

Part of the interview will be presenting them with this year's return, as well as the updated documentation, and asking whether we should file a 1040X. This, of course, is predicated upon the arborist estimates coming in higher than what I filed with.

In a grey area like this, I am finding that having someone else sign my return is a comfort that would be well worth the cost.

Thanks again,

Joe
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