IRS issues safe harbor guidelines to determine hurricane loss
Guidance provided for victims of Hurricanes Harvey, Irma, and Maria
TAX ALERT |
Recently, the IRS issued Rev. Proc. 2018-9, which provides individuals impacted by Hurricanes Harvey, Irma, and Maria with a safe harbor method to help determine the damage to their homes, and the related deduction for income tax purposes. These safe harbors can be used in lieu of determining the actual loss, as is typically required in order to claim a loss.
The revenue procedure covers regions of the county declared federal disaster areas as a result of storm damage attributable to the 2017 storms. However, the regions within the scope of the procedure are defined more broadly than just the Federally declared disaster areas. For purposes of the revenue procedure, 2017 Disaster Area means the entirety of the states of Texas, Louisiana, Florida, Georgia and South Carolina, and the Commonwealth of Puerto Rico and the territory of the U.S. Virgin Islands.
The IRS states in the revenue procedure that it will not challenge an individual’s deterimation of the decrease in fair market value of personal-use residential real property if the individual qualifies for and uses the safe harbor method provided in the revenue procedure.
The revenue procedure covers personal-use residential real property that includes at least one residence, including improvements owned by the individual who suffered a casualty loss. It does not include real property if any part of the real property is used as rental property or includes a home office used in a trade or business. Qualifying property includes property such as a townhouse or duplex and is generally limited to the enclosed portion of the structure. Eligible property types do not include a condominium or cooperative unit, or any other kind of unit where the individual suffering the loss does not own, or owns a fractional interest in, the structural components of the building. Mobile homes and trailers are also not property covered by the revenue procedure.
The procedure provides loss indices on a per square foot basis that taxpayers can use to estimate the loss for qualified property that was deemed a total loss; a near total loss; had interior flooding over one foot; experienced structural damage from wind, rain or debris; experienced damaged to a detached structure; or had damage to decking. The procedure provides guidance as to the definition of these varying types of damage.
Use of this simplified procedure is optional; taxpayers have several other options available to calculate the allowable loss, including certain methods outlined in Revenue Procedure 2018-8, which was released concurrently. Nontheless, the cost indices can significantly simplify the recordkeeping requirements in some cases. Taxpayers affected by the 2017 storms should also remember that they have the option of claiming the loss deduction in the tax year immediately preceding the taxable year in which the disaster occurred.