Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 11, 1994 TAG: 9404120055
SECTION: BUSINESS PAGE: A-8 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
I would like to know the procedure by which I can show this as a loss on my 1994 taxes. Do I need a forester to appraise and set the damage amount? Is the salvage price of any of this timber that might be harvested to be deducted from whatever my loss might be? Can this loss be carried forward to future tax years or backwards into past tax years? Does the IRS have the authority to challenge the amount of loss? Can the IRS determine the amount of loss by use of their choice of independent appraisers?
A: The first step in taking a deduction for a casualty loss is to be able to provide proof of the loss. You must be able to show (a) the type of casualty (ice storm) and the date it occurred, (b) that the loss was a direct result of the storm, and (c) that you were the owner of the property or, if you leased the property from someone else, that you were liable to the owner for the damage.
The second step is to figure the amount of the loss which is the smaller of (a) the decrease in fair market value of the property as a result of the casualty, or (b) your adjusted basis in the property before the casualty.
Fair market value is the price for which, before the storm, you could have sold your property to a willing buyer when neither of you have to sell or buy and both of you know all the relevant facts. Adjusted basis is your basis (usually cost) increased by any improvements and decreased by prior casualty losses (if any).
The fair market value of the property immediately before the casualty and immediately after should be determined by a competent appraiser. The appraiser should be reliable and experienced, have some familiarity with your property before and after the casualty, have knowledge of sales of comparable property in the area, know of conditions in the area of the casualty and use recognized methods of appraisal.
In addition to the appraisal, photographs should be taken of the property. These will be helpful in establishing the condition and value of the property after it was damaged. The cost of the photographs and the appraisal fee are considered an expense of determining your tax liability, not a part of the casualty loss, and are deducted as a miscellaneous deduction subject to the 2 percent of adjusted gross income limit on Line 20, Schedule A of Form 1040.
Normally, you must figure your loss separately for each item damaged; however, a special rule applies for nonbusiness real property. Real property is land, the plants and trees that grow on it, and the buildings and other structures that are placed on it.
For real property that you own for personal use, the loss is the smaller of the decrease in the fair market value of the entire property or the adjusted basis.
The amount of loss is further reduced by any insurance recovery and by any other recovery or reimbursement, such as salvage or scrap proceeds. Please note that if the property is covered by insurance, you must file a timely claim for reimbursement. Otherwise, you cannot deduct the casualty loss.
After you have figured your casualty loss and subtracted any reimbursements, you must figure how much you can deduct.
There are two limits.
The first is that you must reduce each loss by $100. A single $100 reduction applies to each casualty, no matter how many pieces of property are involved.
The second limitation is that you must further reduce your loss by 10 percent of your adjusted gross income (from Line 32 on Form 1040).
All of this information is entered on Form 4684, and the casualty loss remaining after the above two limitations is deducted as an itemized deduction on Line 17, Schedule A, Form 1040. You cannot claim this loss if you do not itemize your deductions.
If the property is used partly for business and partly for personal purposes, the casualty loss must be figured separately for the business portion and the nonbusiness portion as the $100 rule and the 10 percent rule apply only to the nonbusiness portion.
Generally, a casualty loss must be deducted in the year in which the casualty occurred. However, if you are in a federally declared disaster area, you may choose to deduct the loss on your tax return for the year before the loss. This may enable you to get an immediate refund of taxes you already paid. More information is available in IRS Publication 547.
If your casualty loss is more than your income, you may have a net operating loss. You may carryback such a loss to earlier years to obtain a refund of taxes already paid, or you may carry it forward to lower your taxes in future years. You do not have to be in business to have a net operating loss from a casualty.
On the other hand, if your reimbursements (insurance and otherwise) exceed your basis in the property, you may have a taxable gain. While any such gain is normally taxable in the year in which you receive the reimbursement, there are certain elections that may be made to defer the gain if you intend to restore the property to pre-storm condition or purchase replacement property. Again, additional information is available in IRS Publication 547. This publication is free and may be obtained by calling toll-free 1-800-829-3676.
Of course, any claim for a casualty loss may be subject to scrutiny, just like any other figures on any return filed with the IRS. If they believe the claim is not justified, they may challenge it, and very well may use their own experts as a basis for the challenge.
However, if you have a justifiable claim, well documented, and have used a competent appraiser in developing the claim, you will probably prevail in the event of a challenge. I could never recommend not filing a justifiable claim just because of the possibility of an IRS challenge.
Answered by James B. Taney of Anderson & Reed CPAs.
Q: When my son was about 10 years old, we entered a sweepstakes in Ohio and he won $25,000. He started getting that money on his 18th birthday which was in February. He received $6,250 then and will receive three more annual payments of the same amount. We were wondering about the taxes on the check he has received. Should we pay now or file the $6,250 payment next year? Where on the tax form should we enter the sweepstakes payment?
A: Prizes are generally taxable to the winner in the year the money is received. Therefore, if your son received the money in February 1994, the income will go on his 1994 income tax return. The sweepstakes company will probably send him a form 1099 in January 1995 to report the income to him. If you receive this form, make sure that the income is reported to him using his social security number.
Report the winnings as other income on page one of his Form 1040. This line is number 22 on the 1993 forms. You should attach an explanation that shows the payor's name and the amount your son received from them.
Answered by Melinda Chitwood of Brown, Edwards & Co.
Q: In 1993 we paid a loan origination fee of $1,300 for the refinancing of our home which was completed within the same year.
In publication 936 (page 4) it states that the amount, divided by the number of years of the loan (20 in this case) can be deducted each year.
However, it also states that if you use part of the "refinanced mortgage proceeds to improve your main home and you pay the points out of your private funds," you can deduct that amount in the year paid.
Since the $1,300 did not come from the borrowed funds, does this mean that as long as we have $1,300 in receipts for home improvements following the loan application, we can deduct the entire amount for 1993?
A: Generally, points paid to refinance a mortgage are not fully deductible in the year they are paid.
However, if part of the refinanced mortgage proceeds are used to improve your main home and you paid the points out of your private funds, the portion of the points related to the improvements can be fully deducted in the year paid. The portion of the points related to the payment of the existing mortgage are deducted ratably over the term of the new mortgage.
For example, if you refinanced your existing mortgage with a new 15-year $100,000 mortgage and used $25,000 of the loan proceeds to improve your home and $75,000 to repay the existing mortgage, you are allowed to deduct 25 percent of the points paid out of your private funds -- in your case $325 ($25,000/$100,000 X $1,300). The points related to the repayment of the existing mortgage, $975, are deducted over the 15-year term of the new loan.
Example 2 on page 4 of Publication 936 gives an illustration of your situation.
Answered by Gary Duerk of Brown, Edwards & Co.
by CNB