What Is Rev. Proc. 168-96 for Casualty Loss?
Learn about IRS Rev. Proc. 168-96, a safe harbor method that simplifies how homeowners can calculate and substantiate a casualty loss for tax deduction purposes.
Revenue Procedure 2018-08 from the Internal Revenue Service establishes “safe harbor” methods for homeowners to determine the financial loss to a personal residence after a casualty event. This procedure simplifies the calculation process, potentially removing the need for property appraisals. These methods provide a clear framework that the IRS will not challenge if applied correctly. This gives taxpayers a reliable way to substantiate their loss for tax deductions.
Eligibility for Using the Safe Harbor
To use the safe harbor methods, the guidance applies to a taxpayer’s personal-use residential property, such as a primary or second home. Commercial or rental properties are not eligible. The individual claiming the loss must be the legal owner of the damaged property.
The loss must result from a casualty event like a fire, storm, or earthquake. A restriction for tax years 2018 through 2025 is that personal casualty losses are only deductible if the event occurs within a federally declared disaster area. If the property is not in such a zone, a deduction for the personal casualty loss cannot be claimed.
Information Required for Calculation
Before calculating the loss, a taxpayer must gather several pieces of information. This includes the amount of any insurance reimbursement received or expected and the cost basis of the property, which is the original purchase price plus the cost of significant improvements.
For the Estimated Repair Cost Safe Harbor, two separate and independent estimates from licensed or registered contractors are required. These documents must be itemized and outline the costs to restore the home to its pre-casualty condition. If claiming losses for personal belongings, a separate method requires a detailed inventory of each item, including its original cost, age, and current replacement cost.
Calculating the Loss Under Safe Harbor Methods
The Estimated Repair Cost Safe Harbor applies to losses of $20,000 or less and sets the loss amount as the lesser of the property’s cost basis or the lesser of the two repair estimates. This amount is then reduced by any insurance proceeds. For smaller losses of $5,000 or less, the De Minimis Safe Harbor allows a taxpayer to make a good-faith estimate of the loss without a contractor’s estimate. A separate Personal Belongings Safe Harbor provides a way to value lost items using a table to reduce the current replacement cost by a set percentage for each year the item was owned.
After determining the casualty loss amount, two limitations apply. The first $100 of the loss per casualty event is not deductible. The total net casualty loss for the year must also exceed 10% of the taxpayer’s Adjusted Gross Income (AGI) to be deductible.
Reporting the Casualty Loss
The loss is reported on IRS Form 4684, Casualties and Thefts. The final deductible amount from Form 4684 is then transferred to Schedule A (Itemized Deductions) of Form 1040. Taxpayers must maintain thorough records to support their claim. All supporting documentation, including photos of the damage, contractor estimates, insurance statements, and a copy of the loss calculations, should be kept with tax records.