We are thrilled to announce that Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) has joined forces with Bacchetta & Company in an exciting new partnership!

Disaster-Related Tax Losses May Be Less Than Expected

Article Highlights:

  • Limitation to Losses within Disaster Areas 
  • Cost versus Market Value 
  • Home Tax Losses 
  • Home Tax Gains 
  • Replacement Properties 
  • Home Gain Exclusion 
The late-2017 tax-reform package changed the rules for personal casualty losses, which now are only deductible if they occur in a federally declared disaster area. As a result, if a home is destroyed in a forest fire or other disaster within a declared disaster zone, the homeowner can claim a casualty loss on that year’s tax return. However, if a home is destroyed as a result of a normal accident – or is destroyed in a natural disaster but lies outside of a disaster zone – the homeowner cannot claim a casualty loss. These rules may not be fair, but there is nothing that can be done about them (other than calling congressional representatives to indicate your displeasure). Currently, the rules are only in effect for the years 2018 through 2025. Because of these rules, you should also make sure that your home insurance coverage is adequate.

Even those who have deductible losses quickly find out that they cannot claim as much in tax losses as they expected. This is because the losses are not based on the cost of replacing the home; instead, they are based on the original cost of the home (plus any improvements prior to the date of the casualty). For those who have owned their homes for a long time before a casualty, the tax benefits of the resulting loss are greatly diminished.

This all stems from the fact that a casualty loss on a home is valued at the lesser of the home’s cost or its current market value (minus any insurance reimbursements). Because real estate generally appreciates in value, most casualty losses are based on the original cost of the home rather than on its current value or its replacement cost.

Example #1: Joe and Susan purchased their home many years ago for $125,000, but its current market value is $400,000. Their home is then destroyed as a result of a federally declared disaster. They did not have insurance. Thus, their casualty loss is only $125,000 (the original cost), as that is less than the current market value. Thus, even though they suffered a $400,000 financial loss, the tax loss is only $125,000. (Even worse, the actual deductible loss is even less, as reductions of $100 per casualty and 10% of adjusted gross income must first be applied.)

If a home is insured, then an actual financial loss due to a disaster can actually result in a tax gain.

Example #2: The circumstances are the same as in Example #1, except Joe and Susan’s homeowners’ insurance paid them 100% of the home’s current value. For tax purposes, the $125,000 original cost must be used; the insurance reimbursement is then subtracted from that cost to determine the casualty loss. As a result, after the $400,000 reimbursement, Joe and Susan actually have a $275,000 tax gain ($400,000 minus $125,000) instead of a loss.

Luckily, the new tax law includes a provision in which the homeowner can treat the involuntary conversion of a principal residence due to destruction (among other situations) as a sale. Such sales are eligible for the home-sale gain exclusion, provided that the taxpayers meet certain requirements for length of ownership and occupancy. Married taxpayers who file jointly can exclude up to $500,000 of home-sale gain after such a disaster, provided that they have owned and lived in the destroyed home for at least 2 of the prior 5 years. (For a single taxpayer, that exclusion is $250,000.) Thus, in Example 2, if Joe and Susan meet these requirements, they can exclude all of their $275,000 gain (because it is less than $500,000). If the gain is greater than this limit, the remaining amount can be deferred, provided that the taxpayer purchases a replacement residence.

The insurance proceeds that homeowners receive for a destroyed residence (or its contents) are treated as a common pool of funds. If those funds are used to purchase a property that is similar to lost property, then the taxpayer must recognize the gain only to the extent that the funding pool exceeds the cost of the replacement property. The period for replacing damaged or lost property is four years, starting with the end of the first taxable year when any part of a gain due to involuntary conversion is realized.

Under all circumstances, homeowner’s insurance is appropriate; in fact, mortgage lenders generally require it. Be sure that your home is insured for an appropriate amount that includes any appreciation.

As you see, disaster-related casualty losses can be tricky, and the results can be unexpected. Please call this office if you have experienced a disaster-related loss or if you have any questions.



Share this article...

More About Us

Get to Know Prestige Accounting Services Group (previously Prestige Wealth Accounting Group)


Offices in Flemington, NJ and Califon, NJ

Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.

Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.

Tailored Solutions for Every Client: Whether you're a high-net-worth individual seeking comprehensive tax planning or a small business owner in need of accounting and bookkeeping assistance, we have the expertise to meet your needs. Our team takes the time to understand your specific situation and develop customized solutions that align with your goals and objectives.

Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.

Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.

We can't wait for you to experience the Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) difference.

Tax & Small Business Updates

Get the latest in tax and small business updates and issues that affect your finances and growth prospects.

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .

Flemington Office

Looking for tax help in Flemington, NJ? You can find us at:

Millburn Office

Looking for tax help in Millburn, NJ? You can find us at:

Califon Office