Tax Byte
Storm Damage Loss Swamped and Sunk for Lack of Appraisals or Other Proof of Loss (Thomas Richey and Maureen Cleary v. Comm., TCM 2023-43)
Thomas Richey and Maureen Cleary owned a home and a boat in March 2017, when Winter Storm Stella hit Stone Harbor and flooded the city’s streets. Richey and Cleary claimed that the storm damaged the waterside portion of their property and their 40-foot boat, The Celtic Dream. On their 2017 tax return, they claimed total casualty losses of more than $820,000 and a deduction—after considering the income limitation—of nearly $740,000.
Calculating the Deduction:
There are three rules for determining a casualty loss deduction. The first rule is that only physical damage can be counted as a casualty loss and decreases in property value due to a prospective buyer’s fear of future casualties do not qualify. The second rule is that the loss must be proximately caused by a sudden, externally caused event, and not by progressive deterioration. The third and final rule is that the deduction is subject to various limitations, including that it can only be taken in the year the loss occurred, it cannot exceed the adjusted basis of the damaged property, and it is only deductible if the taxpayer is uninsured or filed a timely insurance claim. Taxpayers must also provide proof of the difference in fair market value before and after the casualty event, typically through competent appraisal.
The Deduction WAS DISALLOWED:
The taxpayers did not provide an adequate appraisal of the before and after values of the house. The MLS printouts submitted did not provide an actual valuation of the vacation home, and the fact that the Realtor’s MLS-based appraisal considered market shifts due to the fear of future flooding would by itself render it to be inadequate proof of loss. Appraisals are not always necessary. The cost of repairs may suffice in showing the storm damage, but receipts and estimates submitted included items less related to restoration than to improvement. One estimate, for example, included the cost of building a deck and installing a pool, neither of which had been part of their home before the storm. As regards the deduction for storm damage to the boat, taxpayers failed to submit appraisals of the before and after value, evidence of repairs, or documentation of insurance reimbursements. The entire casualty loss deduction was disallowed.
Tax Practitioner Planning:
TCJA eliminated the personal casualty loss until 2025. If Winter Storm Stella was a designated Federal disaster, properly documented losses would be deductible.