When to Report Casualty Losses

Today's tax question comes from Daniel in California. He asks, "My house burned down in 2003, and for the past three years I've been waiting for the insurance company to settle my claim. The house still hasn't been rebuilt. Can I go back to my 2003 tax return and claim a casualty loss?"

Normally, a casualty loss is deductible in the year that the loss occurred. Since your loss occurred in the year 2003, you are right to be concerned about amending your tax return for 2003 to report the loss. You have three years from the original filing deadline to amend a tax return and claim an additional tax refund.

However, you don't need to worry about your 2003 tax return at all. Here's why.

The loss on your house does not become tax deductible until after the insurance claim is settled. After the insurance settles your claim, you will need to determine if the insurance proceeds reimbursed you for all your losses. Any excess loss over your insurance proceeds becomes a tax deductible loss. If the insurance proceeds exactly cover your losses, then you will have no loss and no tax deduction. Any proceeds over over loss might be taxable income, or might not be taxable. You'll need to work with an experienced tax accountant to tally up your losses, reimbursements, and figure any tax consequences.

If there is a loss, it would be deductible in the year your claim is settled, not in the year of the fire.

In other words, you don't need to worry about the 3-year time limit for claiming a refund from the IRS.

Essential Information:

• Casualty and Theft Losses
• IRS Statute of Limitations
• IRS Publication 547 on Casualties, Disasters, and Thefts
• IRS Publication 584 Casualty Loss Workbook to help you calculate your tax deductible loss
• Treasury Regulations Section 1.165-1(d)(2)(i): When to report a casualty loss when there's an insurance claim pending

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