Catastrophic loss carryforward

[Judge Roy Bean]

Not knowing squat about taxes other than what I read here and pay when Turbo Tax spits out the forms, an extraordinary situation has occurred with a relative who called me in shock.

She's apparently stuck with only being able to deduct (carry forward) $3,000 per year from a non-reimbursed property loss totallying nearly $.5 Million (fire destroyed a home and her insurance was seriously deficient). In other words, she'll have to live (and file) for ~140 more years to realize the total tax deduction.

Does this sound logical, let alone right?

[Imalawman]

Not knowing squat about taxes other than what I read here and pay when Turbo Tax spits out the forms, an extraordinary situation has occurred with a relative who called me in shock.

She's apparently stuck with only being able to deduct (carry forward) $3,000 per year from a non-reimbursed property loss totallying nearly $.5 Million (fire destroyed a home and her insurance was seriously deficient). In other words, she'll have to live (and file) for ~140 more years to realize the total tax deduction.

Does this sound logical, let alone right?

Well, this sounds like a casualty loss to me, so what you've said doesn't quite sound right. A casualty loss (excluding presidentially declared disaster areas) can be deducted in the year the loss occured. (warning this is from memory) There is a 10% of AGI floor that must be met and you must deduct $100 from the loss in question. This would not be a problem here. You would be able to then deduct the remaining loss fully against the current year income. If your relative is not wealthy then there would likely be a net operating loss and under 172 (which applies to individuals too) you would be able to fully deduct the loss two years back and apply for a tentative refund. Then you could deduct the loss for 20 years in the future at 3-5,000 a year. Now, there are many complications with how this works with individuals and the rules for a casualty/disaster loss are rather complex.

But I would say that your statement is not correct for the most part. She should be able to use up most of that loss before she begins carrying the loss forward. Again, the facts in this case are very important and the answer will vary depending on the nature of the property and the individual in question.

[Judge Roy Bean]

Thanks - She is fairly well off and still has relatively limited income tax liability. Her beginning tax liability for the year of the fire was tiny. It still is, except for some long-term capital gains she'll realize if she sells something.

I guess it does indeed appear that a "sixty-something" (that's all she'll admit to ) someone who has set herself up to minimize her tax burden, who loses an under-insured property to a fire will never live long enough to be able to deduct all of the loss.

Something to keep in mind as you get older and properties rise in value.

The insurance companies must love this quirk.

[Bashful]

Is this business property like a rental or her personal property (home or vacation home)? There are different treatments here.

[Judge Roy Bean]

Is this business property like a rental or her personal property (home or vacation home)? There are different treatments here.

It was one of two homes. She's one of those who lives north in the summer and south in the winter. She now has a much smaller replacement place on the same piece of property.

Thanks!

[Bashful]

Then the casualty loss rules apply. As was mentioned above, you take 10% AGI off and another $100. The remaining becomes an itemized deduction. If all that creates a net loss, then you should be able to carry it back and then forward. Check this web link

http://www.irs.gov/taxtopics/tc515.html

and also request publication 536. You can down load it from the IRS web site. That should help you figure things out.