Quake tax breaks help find stability

PATRICIA BLISS

You may be able to deduct your earthquake damage as a casualty loss. A casualty is the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. This certainly includes our earthquake a couple of Wednesdays ago. It does not include accidental breakage or damage done by a pet or mislaid or lost property.

Your casualty loss is the lesser of the adjusted basis in the property before the casualty or theft (if total loss), or decrease in fair market value of the property as a result of the casualty or theft (if partial loss).

Your potential loss is reduced by any insurance received; an insurance claim must be filed or the casualty loss is not allowed. Your loss is reduced further if it is personal use property.

Here's how personal-use property loss reductions are calculated:

You get $100 per casualty for each event that causes the casualty or theft, not to each item. Then add 10 percent of your IRS 1040 form adjusted gross income. Apply this reduction after the $100 per casualty reduction, so that your deduction is loss less 10 percent of adjusted gross income and less $100.

If your loss is to business use property, casualty losses are not subject to the $100 per casualty or the 10 percent of Adjusted Gross Income reduction. If your property was destroyed, the loss is generally the cost of the property minus the depreciation you've already taken. If the property was damaged but not destroyed, the loss is generally the decrease in the property's fair market value. This is limited to your remaining adjusted basis.

Casualty losses on property used in performing services as an employee are reported as miscellaneous itemized deductions. These and other miscellaneous deductions are reduced by 2 percent of your Adjusted Gross Income.

The bad news on insurance reimbursements is, if the reimbursement exceeds the casualty amount (the recovery is more than the tax basis), the profit is taxable. The exception: If the insurance reimbursement is reinvested in similar property, the tax is postponed until the replacement property is sold.

Reinvestment must be made by the end of the second year following the insurance reimbursement and can't be purchased from a related party.

Patricia Bliss is president of Patricia Bliss & Co., providing tax, accounting, and financial advising to small businesses, non-profits, and individuals. Write to Bliss & Co., P.O. Box 1637, Olympia WA 98507; call 754-5848; email ; or visit the Web at www.blisscpa.com.

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