Program Manager Technical Advice 2019-008
A Program Manager Technical Advice (PMTA) has discussed the effective date and scope of the new personal casualty loss limitation. The Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017) added Code Sec. 165(h)(5) to limit individual casualty losses to losses attributable to a Federally declared disaster.
Background. Generally, for tax years before 2018, a loss sustained during a tax year, and not compensated by insurance or otherwise, could be deducted (Code Sec. 165(a)) if such loss arose from fire, storm, shipwreck or other casualty (casualty losses) or from theft. (Code Sec. 165(c))
The TCJA added Code Sec. 165(h)(5)(A), which provides that, for tax years after 2017 and before 2026, individual casualty losses are only deductible to the extent they are attributable to a Federally declared disaster. A Federally declared disaster is any disaster subsequently determined by the president to warrant assistance by the Federal government under the Stafford Act (42 USC §5121 etc.). (Code Sec. 165(i)(5)(A))
A loss occurring in a disaster area and attributable to a Federally declared disaster may, at the election of the taxpayer, be deducted for the tax year immediately preceding the tax year in which the disaster occurred. (Code Sec. 165(i)(1)) A disaster area is the area determined to warrant assistance by the Federal government under the Stafford Act. (Code Sec. 165(i)(5)(B))
Observation. After a Federal disaster is declared for a state, areas eligible for assistance (disaster areas) are identified by county within the affected state.
To be allowed as a casualty loss deduction, a loss must be evidenced by closed and completed transactions and fixed by identifiable events sustained during the tax year. (Reg. §1.165-1(b)) A casualty loss is not sustained when there exists a claim for reimbursement for which there is a reasonable prospect of recovery until it can be ascertained with reasonable certainty whether such reimbursement will be received. (Reg. §1.165-1(d)(2)(i))
New casualty loss limitation. The PTMA provides two examples of how new Code Sec. 165(h)(5) works to limit individual casualty losses.
In the first example, A’s home in Kansas was damaged in 2017 by a flood that was not a Federally declared disaster. A filed a claim with his insurance for the entire loss and had a reasonable prospect of recovering the entire amount claimed. In 2018, A received 70% of the claimed amount from his insurance and it became reasonably certain that A would not recover the other 30% of his claim. Thus, in 2018, A sustained an individual casualty loss equal to 30% of the total flood damage that occurred in 2017. However, A’s individual casualty loss was not deductible under Code Sec. 165(h)(5) because it was not attributable to a Federally declared disaster and was sustained in 2018.
In the second example, same facts as above, except A’s flood damage in 2017 occurred during a storm for which the president issued a Federal disaster declaration for Kansas under the Stafford Act. However, A’s home was not located in one of the counties designated as eligible for assistance.
According to the PMTA, A could claim an individual casualty loss deduction, even though his home was not in one of the designated counties, because Code Sec. 165(h)(5) does not require the loss to occur in a disaster area; it only requires the loss to be attributable to a Federally declared disaster. Therefore, as long as A’s home was in a state that received a Federal disaster declaration and his loss was attributable to that disaster, A was eligible to claim an individual casualty loss deduction in 2018 for the 30% he did not recover from his insurance claim.
References: For deducting individual casualty losses, see FTC 2d/FIN ¶M-1900A; United States Tax Reporter ¶1654.520.