Tax deductions after a home fire

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Q. I lost my home in a fire, and insurance isn’t covering enough to rebuild and replace the way I want. How can I decide what losses can be deducted?
— Putting it back together

A. We’re sorry to hear about the fire, and we hope your family is safe.

As if rebuilding wasn’t enough of a challenge, you now have to be meticulous in your recordkeeping so you can make sure everything is done right.

That includes calculations for your tax return.

Start by getting familiar with IRS Publication 584: Casualty, Disaster, and Theft Loss Workbook, which is a good resource to help you itemize the contents in your home, said Abby Rosen, a certified financial planner with RegentAtlantic in Morristown.

“You can take a casualty loss on your Schedule A due to a fire but you may not be able to take enough to account for your rebuild and replacement costs,” she said.

Rosen offered this example so you can see what could be in front of you:

Say you bought your house for $250,000 and you’ve added $35,000 of improvements. That brings the adjusted basis for your home to $285,000.

Before the fire, your home’s fair market value (FMV) was $300,000. After the fire, it’s $0.

Rosen said your loss calculation begins with the lesser of the two numbers – the $285,000 of adjusted basis is your starting point.

Now let’s add the furniture. Let’s say spent $10,000 on furniture. However, before the fire, you could have sold the contents for $5,000. That makes the starting point for loss of your contents at $5,000 (the lesser of the basis of decline in FMV).

Between your home of $285,000 and the $5,000 of contents, your total starting point is $290,000 of losses, Rosen said.

Next you must deduct any insurance claims you received. Let’s say you were reimbursed $200,000 as a result of insurance claims. The losses that can be deducted are now $90k.

“Now you must deduct $100 plus 10 percent of your AGI,” Rosen said. “Let’s say your AGI is $100,000, you must deduct $10,100 (10 percent of AGI plus $100) from the $90,000. The loss you can take on your schedule A is $79,900.”

Rosen said this calculation was completed using IRS Form 4684.

“Though it’s great that you will reduce your tax bill, I cannot say that the reduction in taxes will equal the amount you are spending to rebuild and replace to your liking,” Rosen said. “Be sure to speak to your tax adviser about any major changes to your tax situation.”

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This post was originally published on Dec. 29, 2016. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.