Alright, in today's episode,
we are going to talk about some,
almost like a consolation prize,
which is not a prize at all, really, but it's when you're accounting for
a personal loss. of property,
so not, yeah, a personal loss of,
say, it's buildings or personal property,
real estate. like, what happens? Are,
are there deductions if you're, you're losing value on,
on, personal property? So here's some examples.
And something going on right now in the state of Utah.
And it's really sad. Like,
I drove past. I drove from New York. I northern Utah to southern Utah
just in the last couple of days. And the amount of fires going on
right now is so sad to see. There's so much going on, so much
loss of property. And it's not just a fire in a forest in the
middle of nowhere. Like, this is, the biggest fire right now in the state
of Utah is the Cottonwood Fire. It's like 90,000 plus acres.
It grew from zero to 60,000 acres I think in like 48 hours.
Just massive devastation of not only the forest,
but of cabins and Eagle Point Ski Resort and this is the area above
Beaver. All sorts of other fires in Utah as well,
but pictures are coming up now as people are accessing their cabins.
In property in the last couple of days, just pictures of,
it's so sad, just burned cabins and burned houses and cars
and, Well, let alone the animals, like some farmers losing their cattle.
It's just, yeah, sad stuff. But when it comes to the taxes
surrounding it, so we have had, I've had some questions already of like,
why what, can you write it off?
Like, if, if you lose property like that,
can you write it off? And so this is, this episode is,
we're going to talk about personal losses and the deductions,
surrounding those. And there's actually,
unfortunately, there's quite a few. limitations,
so it's not, well, I'll give some extreme examples,
it's not, oh, I, my cabin that's worth a million dollars burned down,
I get a million dollar deduction. It's not as simple as that.
There are potentially some deductions and I'll walk you through how,
when, and why it might work. But you,
you might be a little frustrated at the end because there are some pretty
significant limitations on when and how and like what the
actual calculation is. But here's some of the,
here's some of the specifics on, and I will. I'll move forward with that
example of a million dollar cabin and some of the details,
I'll try to walk through the details. I'll not overload you with too many,
but, so there are some very important parts of the details that matter.
So I'm going to give an example of a,
well, I'll give you a couple of different examples,
but the example is the same with the million dollar cabin.
I'll give you an example of when there's really no deduction,
an example where you could have a pretty sizable deduction.
So example one, this is the example with no deduction in the end.
But in this example, say you had a $100,000,
say you had a $100,000 cabin that was built 30 years
ago. So 30 years ago, it was built for $100,000.
Say it was built by grandparents. They handed it down to parents,
and it's now owned by you, 100% owned by you,
but it was 30 years ago for $100,000,
and it's now worth, say, $1,000,000.
So, basis, we're talking about basis and value.
So, the this fire starts, let's say this $1,000,000 cabin burns to the ground,
immediately we can turn it into a tax property.
We go, okay, then like a tax calculation,
we go, okay, $1,000,000 cabin burned down before the fire.
It was worth a million. After, it's worth zero,
and for simplicity,
we'll add insurance here in just a second. Say you had no insurance on
it. What the IRS does,
so say you had no insurance, you did have a loss of a million
to zero, but the tax calculator. The IRS goes off of what you
paid for it. You don't get a loss on what the value was when
it's personal property. They go off of what you paid for it originally,
or what the basis was, and you carry that basis over as you inherit
it, or as you got it from your parents.
family, what was paid for it. So, that basis is $100,000,
and you're deducing it. Your deduction wouldn't be $1,000,000,
your deduction would be $100,000. So that's frustrating.
So here's another example. Same $1,000,000 cabin,
but instead of $100,000 a basis,
let's say you bought that cabin in the last couple years.
That completely changes things.
So now, now you, you actually do have $1,000,000 and again,
let's say no insurance, you probably do, but let's say no insurance,
the value of that goes from $1,000,000 to $0,000,000 after the fire,
but you're buying it. Your basis is $1,000,000 on that cabin,
and so your loss is $1,000,000. So now we take,
in those two examples, we have a $100,000 loss and a $1,000,000 loss,
and now there's limitations we have to stack on top of that,
just as part of calculation for personal casualty.
losses like this. So,
in the $100,000 example, there is a limitation.
Let's say you make $100,000 a year,
like on your tax return, because this is where you're going to file this
loss. You have $100,000 a year of tax return.
The first 10% of your Adjusted Gross Income,
so the first $10,000, is So in that example,
it's a $90,000 deduction.
In the other one, same, same limitations. 10% of your AGI is
not, you can't deduct that or you've got to reduce it,
ah, reduce the deduction. Deduction by 10% of your income,
so a $1,000,000 loss, reduce it by 10%,
and so you'd have what is that, a $990,000 loss. So you can kind
of see how that calculation would work. Say you made $10,000,000 in a year
and you want to take a $1,000,000 loss. from your lost cabin,
it's limited, you have to reduce the deduction by 10% of your income.
So that's, you wouldn't have any, you wouldn't have any loss in that example.
So to throw another wrench into this, I'm actually going to throw two wrenches
into this calculation.
The first is insurance. If you do have insurance,
like most people do in a million dollar cabin,
you might not be reimbursed for the full amount,
but insurance will directly reduce your,
it will directly reduce your deduction. So in that,
that first example. For example, where someone had $100,000 deduction,
if they had, if they got a $500,000 insurance check,
they're not going to get any deduction. Because they were reimbursed more than their
basis, or what their allowed deduction would have been.
And on the other hand, if that person had a $1,000,000 deduction,
and they got a $500,000 insurance check,
they're not, they're not recovered completely. They haven't only got $500,000 for a $1,000,000
cabin, but that would reduce their allowable deduction there.
So I know I could, I could, we could probably build, maybe if someone
wants it, we could build like a whole calculation sheet.
I know the IRS does have tables and calculation sheets to help kind of
come up with what your deduction is, but it's, it,
they're hard to use and they're pretty manual. but like a calculator would work
for this and it really just, when you're doing the tax return is when
the actual calculation takes place. But here's another wrench.
So I told the insurance officer, ah, reduces your loss that you can take.
And, ah, the other one is it needs to be for purpose.
Personal casualty losses like this, it needs to be in,
this is the biggest wrench. Like, it's, it's really frustrating.
but it's, it needs to be in a federally declared disaster area,
which is kind of. It's kind of insane,
or I, I think it's kind of crazy, because it's like,
you could have, say you're the only cabin in a fire that burns out.
It burns down, but say across the state,
you're in a different state, there's a hundred cabins that burn down,
that were, the hundred cabins burn down, they're probably in a different disaster area,
but you're not. They can get a deduction,
you can't. So it's, it's just a subject to.
Politicians decisions, which I think could be frustrating as well.
This Cottonwood fire, we're in, we're in Utah,
it's in Southern Central. That fire is not a federally
declared disaster yet. If I had to guess,
I think it will be, but it's not. It's what June 30th,
the day I'm recording this, there's a did some research on it there.
There's like federally available, or funds that are available from
the federal government, but it's not a disaster area,
it's not formally declared as a disaster area yet.
So that's, that's still pending,
but something to watch for as well. So hopefully that's helpful.
There's. Quite a few moving parts.
I mentioned the insurance wrench, insurance reduces what your deduction is,
10% of your income reduces what you're deduction is.
Being in a federally declared disaster area will
determine whether or not you're in a state
before and after an event. but those are some things you should be thinking
through. And if you, if you're someone who's lost something or you know someone
that's lost, yeah, feel free to send them this episode or reach out if
you, if you do want to calculate. Bill, if you have any specific questions
on it, we're happy to go through those with our clients
or. Or for general questions, we'll, we'll keep putting out more content,
but I hope you have a good rest of the day and I'll talk
to you later. See ya.
