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Mr. Feichthaler,
I, like millions of others, filed my income tax return this week prior to the deadline. With the damage caused by the hurricane, the income tax bill was a tough pill to swallow. One of your clients is my neighbor, and he said you told him that there is a way to claim a deduction from the hurricane, even if I had minor damage? He also said he received a refund of $6,000 as a result. Is it possible I could claim this deduction, and is it too late now that April 18 has passed?
--George and Elizabeth F.
Dear George and Elizabeth,
Like you, my family continues to navigate the tasks of repairing our roof and other damage, making insurance claims, and waiting for inspections. Even though tax time is never pleasant, the IRS regulations regarding deductions that can be taken as a result of Hurricane Ian have led to very beneficial results for nearly all of my clients, including your neighbor.
The media has reported many times that there is the potential to deduct out-of-pocket expenses relating to the hurricane if you itemize, and that is the way to obtain a benefit. While there is a potential benefit to deducting these expenses, the alternate procedure to determine deductible losses has provided much more benefit to residents of Cape Coral, as well as the rest of Lee County.
The IRS looks first to see what the value of the property was immediately before and after the hurricane. It is clear from anecdotal data that the highest prices occurred on contracts signed right before interest rates commenced their sky-high climb. These contracts happened to close right before the hurricane. After the storm, these higher rates, combined with damage incurred and people selling for significantly lower prices, provides the evidence needed that home values went down during this time. The IRS will seek to have proof of these through a professional Realtor or appraiser preparing a report showing the change. My clients have seen an average decline of 12%.
So, for a home with $500,000, the potential deduction from taxable income is $60,000. The next step is to offset this amount by any insurance proceeds received. You noted you had minor damage, so it may be safe to assume you made claim, given the high deductibles you would endure from a claim. However, allow me to estimate you received a $10,000 payment from your insurance company. So far, your net loss is $50,000.
The next task is to determine your adjusted gross income, or AGI, for 2022. The IRS states you cannot claim the loss for the first 10% of your AGI. So, if you made $60,000 last year, after other deductions and exclusions, you cannot claim the first $6,000 of losses. Now, your net deduction amount is $44,000.
With the above facts, you would deduct $44,000 from your $60,000 AGI amount. Assuming an average tax rate of 20%, you would be entitled to a refund of $8,800, above and beyond what you would already have received. This strategy can lead to excellent results for homeowners in Cape Coral and beyond. Generally speaking, the higher the value of your property, and the lower your insurance payments received are, the greater the benefit.
As you said, many people have already filed their tax returns. However, amended returns can be filed once the appraisal is attained and the forms are completed to be submitted to the IRS. So, it's not too late! Potentially even better news is that this deduction can be taken in the loss year (2022) OR the prior year (2021). So, if you were in a higher tax bracket in 2021, you may have an even greater benefit.
The final note is the 10% AGI floor rule. A vote by Congress to remove this floor is required. The last time this was done was for Hurricane Irma in 2017. Considering the scope of this storm, the removal of the 10% AGI limitation should be the bipartisan issue of the year. If it is removed, all those who already filed for the deduction can file an amended return to obtain the benefit from that removal.
It has been a refreshing change to see people surprised in a positive way at tax time, and I hope you will benefit from the tax rules on casualty losses.
Eric P. Feichthaler has lived in Cape Coral for over 35 years and graduated from Mariner High School in Cape Coral. After completing law school at Georgetown University in Washington, D.C., he returned to Southwest Florida to practice law and raise a family. He served as mayor of Cape Coral from 2005-2008, and continues his service to the community through the Cape Coral Caring Center, Cape Coral Museum of History, and Cape Coral Kiwanis. He has been married to his wife, Mary, for over 20 years, and they have four children together. He earned his board certification in Real Estate Law from the Florida Bar. He is AV Preeminent rated by Martindale-Hubbell for professional ethics and legal ability, and is a Supreme Court Certified Circuit Civil Mediator. He can be reached at eric@capecoralattorney.com, or 239-542-4733.
This article is general in nature and not intended as legal advice to anyone. Individuals should seek legal counsel before acting on any matter of legal rights and obligations.