On December 13, 2017, the Internal Revenue Service issued guidance providing safe harbor methods that individuals may use in determining the amount of their casualty and theft losses for their homes and personal belongings, including losses from recent hurricanes. Below please find brief summaries of the safe harbor provisions that the IRS issued in this guidance.
De Minimis Safe Harbor Method
Under the De Minimis Safe Harbor Method, an individual may make a good faith estimate of the decrease in the fair market value of the individual’s personal belongings. An individual using the De Minimis Safe Harbor Method must maintain records describing the personal belongings affected and detailing the methodology used for estimating the loss. The De Minimis Safe Harbor Method is available for casualty or theft losses of $5,000 or less, prior to application of the limitations under §165(h).
Replacement Cost Safe Harbor Method
Except as provided in section 5.02(2) of this revenue procedure, an individual may use the safe harbor method in this section 5.02(1) to determine the fair market value of the individual’s personal belongings located in a disaster area immediately before a Federally declared disaster in order to compute the amount of a casualty or theft loss. If an individual chooses to use the Replacement Cost Safe Harbor Method for a Federally declared disaster, the individual must apply that method to all personal belongings for which a loss is claimed under § 165 for that Federally declared disaster, except those specifically excluded in section 5.02(2) of this revenue procedure.To use this safe harbor method, an individual must first determine the current cost to replace the personal belonging with a new one and reduce that amount by 10% for each year the individual owned the personal belonging using the percentages in the Personal Belongings Valuation Table below. If the personal belonging was owned by the individual for nine or more years, the pre-disaster fair market value is 10% of the
current replacement cost under this safe harbor method.
An individual’s personal belongings included a couch destroyed by a hurricane in a Federally declared disaster area. The individual purchased the couch for $700 four years prior to the hurricane. The cost to replace the couch with a new couch is $1,000. The couch is not insured. Using the Replacement Cost Safe Harbor Method for Federally declared disaster areas, the individual computes the fair market value of the couch immediately before the hurricane by multiplying the current replacement cost of the couch, $1,000, by the applicable percentage of replacement cost from the Personal Belongings Valuation table, 60%: $1,000 x 60% = $600 The individual determines the decrease in the fair market value of the couch by subtracting $0, the fair market value of the couch immediately after the hurricane, from $600, the fair market value of the couch immediately before the hurricane. $600 – 0 = $600 The individual compares the basis of $700 with the decrease in fair market value of $600. Since the decrease in fair market value is less than the basis, the amount of the individual’s casualty loss is $600.
Tax changes and updates are occurring frequently at this time, and our firm wants to make sure you have the information you need to prepare for 2017 tax filings. Should you have any questions, please do not hesitate to contact us at 239.433.5554.
Please see our other blog post on Safe Harbor methods Personal-Use Residential Real Property