When natural disasters occur, they often leave many people
with severely damaged or destroyed homes and businesses. Some lose everything
they own. If you are affected by a disaster that is declared by the President
to qualify for federal assistance, there are several provisions in the tax law
that may provide relief.
Extended tax deadline and interest abatement. The IRS is
authorized to postpone the deadlines for filing returns and paying taxes for up
to 120 days in a Presidentially declared disaster area. Also, the IRS will not
charge interest that would otherwise accrue for the extension period.
Faster refund. Taxpayers suffering losses in a federal
disaster area have a choice of which tax year to deduct the casualty loss. You
may deduct it on the return for the year the loss occurs, or it can be claimed
on your prior year's tax return. Amending your prior year's return may give you
a refund of much-needed cash sooner than waiting to deduct the loss on your
current year's tax return.
Tax-free gain. If the insurance payments you receive exceed
the tax basis of your property, you will end up with a casualty gain. Casualty
gains in federal disaster areas receive special tax treatment. For example:
*Individuals may qualify for up to a $250,000 gain exclusion
($500,000 for married couples) on their principal residence. That's because the
destruction of the residence is treated as a "sale" for tax purposes.
*No gain is recognized on the insurance reimbursement for
the contents of a building as long as those contents were not separately listed
on the insurance policy.
*If you replace your property with similar property within
four years, you may be able to avoid or postpone paying tax on any gain from
your involuntary conversion.
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