In the aftermath of last month’s wildfires that destroyed or damaged more than 13,000 residences along the North Coast, many homeowners have turned to their personal checklist to make sure their financial house is at least in order.
The first call is typically to their insurance agent to start the claims process, followed by the bank or servicer that is handling their mortgage if their residence is uninhabitable. But fire victims should also consider checking in with their accountant as well to see if tax laws make them eligible for financial relief.
“You should absolutely reach out,” said Aaron Tompkins, a senior tax manager at Moss Adams in Santa Rosa.
The federal tax code allows victims of federally declared natural disasters to deduct itemized losses on their tax returns. California law also generally follows federal rules on the treatment of losses incurred from a natural disaster.
But the process to determine eligibility can be complicated. Accountants suggest contacting them for assistance, especially because large-scale natural disasters don’t occur as frequently here as, say the Gulf Coast, and most people are unfamiliar with the ins and outs.
“It’s fairly complicated,” said Dave Dillwood, a partner of the Dillwood Burkel & Millar accounting firm in Santa Rosa. Dillwood is working on the claims process for his 80-year-old mother-in-law, who lost her house in Fountaingrove. Three other employees in his office also lost their residences in the blazes. “It’s like multi-variable algebra.”
Residents should first try to get as much payout from their insurance policies as they will allow, Dillwood noted, because it will generate a better sum.
“Getting some money from your insurance company is better than getting a bigger (taxable) loss,” he said.
He estimated that money recouped through the tax code would generate up to 33 cents for every $1 of loss from the fires. But some residents, such as homeowners who are underinsured or those who have suffered a significant loss of income, are likely well-suited to get some relief from the tax code.
Taxpayers can deduct their casualty property loss, which is defined by the Internal Revenue Service as a “sudden, unexpected or unusual event” such as an earthquake, fire or flood. But that loss is reduced by the amount of insurance policyholders are subsequently reimbursed by their carriers for cost of replacing the structure as well as personal property.
Those who have received emergency grants from the Federal Emergency Management Agency will not have to deduct those funds from the property loss calculation, unless they are used for replacement of lost or destroyed property. The FEMA grants also are not considered taxable income.
To calculate the amount of the loss, taxpayers will need to determine the “adjusted basis” of the property before the fire. The adjusted basis is the amount of money paid for the home plus any subsequent improvements made to the structure.
They also will need to find the decrease in fair market value of the property in the aftermath of the disaster. That’s the difference between the price a displaced homeowner could sell his land for now, versus what it could have been sold for prior to the fires.
The taxpayer will then select the lesser of those two real-estate calculations and subtract the amount of money he or she received from the insurance settlement for the home.