Revenue Procedure 2006-32 |
July 10, 2006 |
Casualty and Theft Losses as a Result of
the 2005 Gulf Hurricanes
.01 This revenue procedure provides safe harbor methods that individual
taxpayers may use in determining the amount of their casualty and theft loss
deductions pursuant to § 165 of the Internal Revenue Code for their
personal-use residential real property (as defined in section 3.02 of this
revenue procedure) and personal belongings (as defined in section 3.03 of
this revenue procedure) damaged, destroyed, or stolen as a result of Hurricanes
Katrina, Rita, and Wilma (“the 2005 Gulf hurricanes”). Specifically,
this revenue procedure provides three safe harbor methods that individuals
may use to determine the decrease in fair market value of personal-use residential
real property. This revenue procedure also provides a fourth safe harbor
method that individuals may use to determine the fair market value of their
personal belongings immediately before the 2005 Gulf hurricanes.
.02 The Internal Revenue Service will not challenge an individual’s
determination of the decrease in fair market value of personal-use residential
real property attributable to one of the 2005 Gulf hurricanes if the individual
qualifies for and uses one of the safe harbor methods described in section
4 of this revenue procedure. Furthermore, the IRS will not challenge an individual’s
determination of the fair market value of personal belongings immediately
before one of the 2005 Gulf hurricanes if the individual qualifies for and
uses the safe harbor method described in section 7 of this revenue procedure.
.03 Finally, this revenue procedure requires that if an individual uses
the Cost Indexes Safe Harbor Method described in section 4.04 of this revenue
procedure, the individual also must take into account the value of any no-cost
repairs as described in section 6 of this revenue procedure.
.04 Use of a safe harbor method described in this revenue procedure
is not mandatory. An individual may, instead, use the actual reduction in
the fair market value of personal-use residential real property or personal
belongings, pursuant to § 1.165-7(a)(2) of the Income Tax Regulations,
if the individual has proper substantiation.
.05 The safe harbor methods provided in this revenue procedure apply
only to the circumstances within the scope of this revenue procedure and may
not be used in any other circumstances.
.01 Section 165(a) generally provides that a taxpayer may deduct any
loss sustained during the taxable year and not compensated for by insurance
or otherwise. With respect to property not connected with a trade or business
or a transaction entered into for profit, § 165(c)(3) limits an
individual taxpayer’s deductions to losses arising from fire, storm,
shipwreck, or other casualty, or from theft.
.02 Section 165(h) imposes two limitations on casualty and theft loss
deductions for property not connected with a trade or business or transaction
entered into for profit. Section 165(h)(1) provides that any loss to an individual
described in § 165(c)(3) shall be allowed only to the extent that
the amount of the loss arising from each casualty, or from each theft, exceeds
$100. Section 165(h)(2) provides that if personal casualty and theft losses
for any taxable year exceed personal casualty and theft gains for the taxable
year, the losses are allowed only to the extent of the sum of the amount of
the gains, plus so much of the excess as exceeds ten percent of the adjusted
gross income of the individual.
.03 Section 1400M(2) defines “Hurricane Katrina disaster area”
as an area with respect to which a major disaster has been declared by the
President before September 14, 2005, under § 401 of Robert T. Stafford
Disaster Relief and Emergency Assistance Act (“Stafford Act”)
(42 USC § 5170) by reason of Hurricane Katrina. The Hurricane Katrina
disaster area covers the entire states of Alabama, Florida, Louisiana, and
Mississippi. Section 1400M(4) defines “Hurricane Rita disaster area”
as an area with respect to which a major disaster has been declared by the
President before October 6, 2005, under § 401 of the Stafford Act
by reason of Hurricane Rita. The Hurricane Rita disaster area covers the
entire states of Louisiana and Texas. Section 1400M(6) defines “Hurricane
Wilma disaster area” as an area with respect to which a major disaster
has been declared by the President before November 14, 2005, under § 401
of the Stafford Act by reason of Hurricane Wilma. The Hurricane Wilma disaster
area covers the entire state of Florida.
.04 Section 1400S(b) suspends the limitations on personal casualty and
theft loss deductions imposed by § 165(h) if the losses are attributable
to the applicable 2005 Gulf hurricane and arose in the (1) Hurricane Katrina
disaster area on or after August 25, 2005, (2)Hurricane Rita disaster area
on or after September 23, 2005, or (3) Hurricane Wilma disaster area on or
after October 23, 2005.
.05 Section 1.165-1(c)(4) provides that in determining the amount of
loss sustained, adjustments must be made for any insurance or other compensation
received.
.06 Section 1.165-7(b) provides that the amount of a casualty loss is
the lesser of (1) the difference between the fair market value of the property
immediately before the casualty and the fair market value immediately after
the casualty, or (2) the adjusted basis of the property. Section 1012 and
§ 1.1012-1(a) provide that the basis of property generally is its
cost. Section 1016(a)(1) and § 1.1016-2(a) provide that the basis
of property is adjusted for any expenditure, receipt, loss, or other item,
properly chargeable to capital account, including the cost of improvements
and betterments made to the property.
.07 Section 1.165-7(a)(2)(i) provides that to determine the amount of
the deductible loss under section 165(a), the fair market value of the property
immediately before and immediately after the casualty generally shall be ascertained
by competent appraisal. Section 1.165-7(a)(2)(ii) provides that the cost
of repairs to the property damaged is acceptable as evidence of the decrease
in value of the property if the taxpayer shows that: (1) the repairs are necessary
to restore the property to its condition immediately before the casualty;
(2) the amount spent for such repairs is not excessive; (3) the repairs do
not care for more than the damage suffered; and (4) the value of the property
after the repairs does not, as a result of the repairs, exceed the value of
the property immediately before the casualty. In order to use the cost-of-repairs
method to determine the decrease in fair market value, the taxpayer must actually
make the repairs rather than rely on estimates of repairs that will be
performed in the future or not at all. See Lamphere v. Commissioner,
70 T.C. 391, 396 (1978), acq., 1978-2 C.B. 2; Farber
v. Commissioner, 57 T.C. 714, 719 (1972), acq.,
1972-2 C.B. 2.
.08 Section 1.165-8(c) provides that the amount deductible in the case
of a theft loss is determined consistently with the manner described in § 1.165-7
for determining the amount of a casualty loss. The fair market value of the
property immediately after the theft is considered to be zero.
.09 Section 1.165-7(b)(2)(ii) provides that in determining a casualty
loss involving real property and improvements thereon not used in a trade
or business or in any transaction entered into for profit, the improvements
(such as buildings and ornamental trees and shrubbery) to the property damaged
or destroyed are considered an integral part of the property, and no separate
basis need be apportioned to the improvements.
.10 Due to the widespread devastation from the 2005 Gulf hurricanes,
it may be difficult for individuals to determine the decrease in the fair
market value of damaged, destroyed, or stolen property using the methods provided
in § 1.165-7(a)(2). The IRS and Treasury Department recognize that
the statutory suspension of § 165(h) limitations on 2005 Gulf hurricane
casualty loss deductions provided by § 1400S reflects Congressional
intent to facilitate certain deductions. In view of these unique circumstances,
the IRS and Treasury Department believe it is appropriate to provide safe
harbor methods for use in determining the amount of casualty and theft loss
deductions for certain property damaged, destroyed, or stolen as a result
of the 2005 Gulf hurricanes. Therefore, this revenue procedure provides safe
harbor methods that individuals may use under § 1.165-7(a)(2)(i)
to measure the decrease in the fair market value of their personal-use residential
real property that was damaged or destroyed and to determine the pre-hurricane
fair market value of personal belongings that were damaged, destroyed, or
stolen as a result of one of the 2005 Gulf hurricanes.
.01 In general. An individual who suffered a casualty
or theft loss for the individual’s personal-use residential real property
or personal belongings damaged, destroyed, or stolen as result of the 2005
Gulf hurricanes may use the safe harbor methods provided in this revenue procedure
in determining the amount of the individual’s casualty and theft loss
deductions under § 165.
.02 Definition of personal-use residential real property and
personal residence. For purposes of this revenue procedure, personal-use
residential real property is real property, including improvements (such as
buildings and ornamental trees and shrubbery) that is owned by the individual
who suffered a casualty loss, that contains at least one personal residence,
and that is not used in a trade or business or in a transaction entered into
for profit. Personal-use residential real property does not include rental
property. For purposes of this revenue procedure, a personal residence is
a single family residence, or a single unit within a contiguous group of attached
residential units (for example, a townhouse or duplex), owned by the individual
who suffered a casualty loss, and consists of the total enclosed square footage
of the residence or single unit, including any enclosed structures attached
to the residence or single unit. For example, a personal residence includes
a basement and an attached garage, but does not include a deck or screened-in
porch. For purposes of this revenue procedure, a personal residence does
not include a condominium or cooperative unit, or any other property for which
the individual who suffered the casualty loss does not own the structural
components of the building (such as the foundation, walls, and roof), or owns
only a fractional interest in all of the structural components of the building,
or a mobile home or trailer.
.03 Definition of personal belongings. For purposes
of this revenue procedure, a personal belonging is an item of tangible personal
property that is owned by the individual who suffered a casualty or theft
loss and that is not used in a trade or business or in a transaction entered
into for profit. For purposes of this revenue procedure, personal belongings
do not include a boat, aircraft, mobile home, trailer, or vehicle (as defined
in section 7.02 of this revenue procedure), or an antique or other asset that
maintains or increases its value over time.
.04 Use of three personal-use residential real property safe
harbor methods. An individual described in section 3.01 of this
revenue procedure may use any of the three safe harbor methods described in
section 4 of this revenue procedure to determine the decrease in fair market
value for personal-use residential real property located in the Hurricane
Katrina disaster area, Hurricane Rita disaster area, or Hurricane Wilma disaster
area (see section 2.03 of this revenue procedure) that was damaged or destroyed
as a result of one or more of the 2005 Gulf hurricanes. The three personal-use
residential real property safe harbor methods are the Insurance Safe Harbor
Method described in section 4.02 of this revenue procedure, the Contractor
Safe Harbor Method described in section 4.03 of this revenue procedure, and
the Cost Indexes Safe Harbor Method described in section 4.04 of this revenue
procedure.
.05 Use of Cost Indexes Safe Harbor Method. An
individual may use the Cost Indexes Safe Harbor Method if the individual’s
personal-use residential real property has suffered, in the circumstances
described below, (1) a total loss of a personal residence, (2) a near total
loss of a personal residence, (3) interior flooding over 1 foot of a personal
residence, (4) structural damage from wind, rain, or debris to a personal
residence, (5) roof covering damage from wind, rain, or debris to a personal
residence, (6) damage to a detached structure, or (7) damage to wood decking:
(1) Total loss. A total loss of a personal residence
occurs if, as a result of a storm surge or catastrophic prolonged flooding
due to breaching or overtopping of a protective levee system during one of
the 2005 Gulf hurricanes, any one of the following occurred:
(a) The personal residence either collapsed or is structurally unsound
(for example, the structural connections in the personal residence, such as
nails and anchor bolts, have corroded as a result of prolonged exposure to
salt water (including brackish water) over an extended period of time to the
extent that they compromise the structural integrity of the personal residence);
(b) The state or local government or any political subdivision thereof
has ordered that the personal residence be demolished or relocated;
(c) The individual has sold the personal residence to an unrelated party
for a price that reflects the fair market value solely of the land on which
the personal residence is situated; or
(d) The personal residence sustained damage that satisfies the definition
of near total loss, as described in section 3.05(2) of this revenue procedure,
and the individual has demolished the personal residence.
(2) Near total loss. The near total loss of a personal
residence occurs if, as a result of a storm surge or catastrophic prolonged
flooding due to breaching or overtopping of a protective levee system during
one or more of the 2005 Gulf hurricanes, the personal residence sustained
severe damage necessitating the removal and disposal of substantially all
interior wall frame coverings (including drywall and other wall frame coverings),
floorings, electrical lines, ducts, plumbing, and other fixtures. For a personal
residence sustaining near total loss, only the wood frame, rafters, and outside
façade of the personal residence remain structurally sound and reusable.
(3) Interior flooding over 1 foot. Interior flooding
over 1 foot occurs if a personal residence was flooded with salt water (including
brackish water) to a height of more than 1 foot as a result of a storm surge
or catastrophic prolonged flooding due to breaching or overtopping of a protective
levee system during one or more of the 2005 Gulf hurricanes, but did not sustain
damage that falls within the definition of total loss or near total loss,
as described in section 3.05(1) and (2) of this revenue procedure.
(4) Structural damage from wind, rain, or debris.
Structural damage from wind, rain, or debris occurs if a personal residence
sustained major structural damage to the roof and/or outside wall(s) as a
result of wind or windblown debris from one or more of the 2005 Gulf hurricanes
that exposed part or all of the interior of the personal residence to rain
or debris, requiring substantial renovation of the damaged areas. Substantial
renovation requires the removal and replacement of drywall or other wall frame
coverings, replacement of trim, and repair and painting of the damaged interior
areas of the personal residence.
(5) Roof covering damage from wind, rain, or debris.
Roof covering damage from wind, rain, or debris occurs if a personal residence
sustains damage from wind, rain, or windblown debris to roofing felt, shingles,
flashings, fascia, or soffit as a result of one or more of the 2005 Gulf hurricanes.
(6) Detached structures. A detached structure
consists of a detached structure on personal-use residential real property
where the detached structure sustained damage from one or more of the 2005
Gulf hurricanes to the extent that it requires either complete or major rebuilding.
A detached structure includes a shed, shop, or detached garage that is not
used in connection with a trade or business and that is not equipped with
heating or air conditioning. Furthermore, a detached structure is of enclosed
wood-frame construction, with some electrical capabilities and little or no
interior finishing.
(7) Wood decking. Wood decking consists of pressure
treated wood decking attached to a personal residence where the decking was
damaged or destroyed by one of the 2005 Gulf hurricanes.
.06 Taking into account no-cost repairs. An individual
using the Cost Indexes Safe Harbor Method described in section 4.04 of this
revenue procedure must take into account the value of any no-cost repairs
as described in section 6 of this revenue procedure.
.07 Use of Personal Belongings Safe Harbor Method.
An individual may use the Personal Belongings Safe Harbor Method described
in section 7.01 of this revenue procedure to determine the pre-hurricane fair
market value of the individual’s personal belongings located in the
Hurricane Katrina disaster area, Hurricane Rita disaster area, or Hurricane
Wilma disaster area (see section 2.03 of this revenue procedure) that were
damaged, destroyed, or stolen as a result of one of the 2005 Gulf hurricanes.
.08 Limited use of safe harbor methods. The safe
harbor methods described in sections 4 and 7 are available only in the circumstances
described in this revenue procedure.
SECTION 4. PERSONAL-USE RESIDENTIAL REAL PROPERTY SAFE HARBOR METHODS
.01 In general. An individual within the scope
of this revenue procedure may use any one of the three safe harbor methods
described in this section 4. If an individual owns two or more parcels of
personal-use residential real property, the use of a safe harbor method for
one parcel does not require the individual to use the same safe harbor method,
or any safe harbor method, for any other parcel.
.02 Insurance Safe Harbor Method. Under the Insurance
Safe Harbor Method, to determine the decrease in the fair market value of
the individual’s personal-use residential real property, an individual
may use the estimated loss determined in reports prepared by the individual’s
homeowners’ or flood insurance company setting forth the estimated loss
the individual sustained as a result of the damage to or destruction of the
individual’s personal-use residential real property from one of the
2005 Gulf hurricanes.
.03 Contractor Safe Harbor Method. Under the Contractor
Safe Harbor Method, to determine the decrease in the fair market value of
the individual’s personal-use residential real property, an individual
may use the contract price for the repairs specified in an itemized contract
prepared by a contractor, licensed or registered in accordance with State
or local regulations, setting forth the costs to restore the individual’s
personal-use residential real property to the condition existing immediately
prior to the applicable 2005 Gulf hurricane. However, the costs of any improvements
or additions that increase the value of the personal-use residential real
property above its pre-hurricane value, such as the cost to elevate the personal
residence to meet new construction requirements, must be excluded from the
contract price for purposes of this safe harbor. To use the Contractor Safe
Harbor Method, the contract must be a binding contract signed by the individual
and the contractor.
.04 Cost Indexes Safe Harbor Method.
(1) In General. Under the Cost Indexes Safe Harbor
Method, an individual may use one or more of the cost indexes, as applicable,
provided in this section 4.04 to determine the decrease in the fair market
value of personal-use residential real property, including the personal residence,
detached structures, and wood decking. Cost indexes are provided for three
size categories of personal residences based on the square footage of the
personal residence.
In computing the decrease in fair market value under the Cost Indexes
Safe Harbor Method, an individual must take into account the value of any
no-cost repairs as described in section 6 of this revenue procedure.
If the Cost Indexes Safe Harbor Method described in this section 4.04
is used, the amount determined is the full amount of the decrease in fair
market value of that personal-use residential real property, and may not be
increased by amounts related to items such as landscaping, debris removal,
demolition, etc.
The Cost Indexes Safe Harbor Method applies only to the following three
types of improvements on an individual’s personal-use residential real
property: a personal residence (as described in section 3.02 of this revenue
procedure), a detached structure (as described in section 3.05(6) of this
revenue procedure), and a pressure treated wood deck (as described in section
3.05(7) of this revenue procedure). If there is any other type of improvement
on an individual’s personal-use residential real property that is not
described in sections 3.02, 3.05(6) and 3.05(7) of this revenue procedure,
the individual may use the Cost Indexes Safe Harbor Method to determine the
decrease in fair market value of the personal-use residential real property,
but may not add any amount for the other type of improvements. For example,
under the Cost Indexes Safe Harbor Method, no amount may be added to the decrease
in fair market value of the personal-use residential real property for a residence
that contains a home office, a residence in a structure that contains five
or more residential units, a detached structure equipped with heating or air
conditioning, or a deck made of synthetic material or hardwood that is not
pressure treated.
(2) Special rules for Cost Indexes Safe Harbor Method.
(a) A personal residence may not be subject to more than one of the
following tables: Table 1 (Total Loss); Table 2 (Near Total Loss); or Table
3 (Interior Flooding Over 1 Foot).
(b) A personal residence subject to Table 3 (Interior Flooding Over
1 Foot) also may be subject to Table 4 (Structural Damage From Wind, Rain,
or Debris), but the square footage flooded may not be included in the square
footage used for Table 4 (Structural Damage From Wind, Rain, or Debris).
(c) A personal residence subject to Table 3 (Interior Flooding Over
1 Foot) or Table 4 (Structural Damage From Wind, Rain, or Debris) may also
be subject to Table 5 (Roof Covering Damage from Wind, Rain, or Debris).
(d) Table 6 (Detached Structures) and Table 7 (Wood Decking) may apply
to any personal-use residential real property to which Table 1 (Total Loss),
Table 2 (Near Total Loss), or Table 3 (Interior Flooding Over 1 Foot), Table
4 (Structural Damage From Wind, Rain, or Debris), or Table 5 (Roof Covering
Damage From Wind, Rain, or Debris) apply.
(e) If an individual’s personal-use residential real property
contains more than one personal residence and the individual uses the Cost
Indexes Safe Harbor Method, the individual must apply the applicable table,
or combination of tables, to each personal residence.
(3) Tables. The following tables set forth the
cost indexes for each corresponding category described in section 3.05 of
this revenue procedure:
For a personal residence that falls within the description of a total
loss in section 3.05(1) of this revenue procedure, use Table 1 as follows:
(1) Determine the total square footage of the personal residence.
(2) Determine the size of the personal residence based on the total
square footage described in Table 1.
(3) Multiply the total square footage of the personal residence (from
step 1) by the applicable Cost Index in column 2 of Table 1.
For a personal residence that falls within the description of a near
total loss in section 3.05(2) of this revenue procedure, use Table 2 as follows:
(1) Determine the total square footage of the personal residence.
(2) Determine the size of the personal residence based on the total
square footage described in Table 2.
(3) Multiply the total square footage of the personal residence (from
step 1) by the applicable cost index in column 2 of Table 2.
The cost indexes in Table 3 are applied only to the square footage of
the personal residence that was flooded, rather than the total square footage.
For a personal residence that was flooded by salt water (including brackish
water) to a height of greater than 1 foot, as described in section 3.05(3)
of this revenue procedure, and does not fall within the description of a total
loss or near total loss in sections 3.05(1) and (2) of this revenue procedure,
use Table 3 as follows:
(1) Determine the total square footage of the personal residence.
(2) Determine the size of the personal residence based on the total
square footage described in Table 3.
(3) Determine the square footage of the flooded area of the personal
residence.
(4) Multiply the flooded square footage (from step 3) by the applicable
cost index in column 2 of Table 3.
The cost indexes in Table 4 apply only to the square footage of the
damaged area of the personal residence, rather than the total square footage.
Personal residences that sustained 100% wind, rain, or debris damage are
those that sustained major structural damage throughout the entire personal
residence necessitating substantial renovation (as defined in section 3.05(4)
of this revenue procedure) of all of the rooms in the personal residence.
For a personal residence that sustained structural damage from wind,
rain, or debris, use Table 4 as follows:
(1) Determine the total square footage of the personal residence.
(2) Determine the square footage of the damaged portion of the personal
residence by adding the square footage of each room needing substantial renovation.
(3) Determine the percent of square footage of the personal residence
that was damaged by dividing the square footage that was damaged (from step
2) by the total square footage (from step 1).
(4) Multiply the square footage of the damaged area (from step 2) by
the applicable cost index in column 2 of Table 4 (based on the percent of
damage range in column 1 of Table 4).
If the personal residence sustained roof covering damage from wind,
rain, or debris as described in section 3.05(5) of this revenue procedure,
apply the applicable cost index in Table 5 to the total square footage under
the roof (including the porch, patios, and overhangs).
For a personal residence that sustained roof covering damage from wind,
rain, or debris, as described in section 3.05(5) of this revenue procedure,
use Table 5 as follows:
(1) Determine the total square footage of the ground floor of the personal
residence.
(2) Add to the total square footage of the ground floor (from step 1)
the square footage of any area of the roof that extends beyond the ground
floor, such as porches and attached carports, to determine the total square
footage under the roof.
(3) Determine the applicable cost index in column 2 of Table 5 based
on the total square footage of the personal residence.
(4) Multiply the total square footage under the roof (from step 2) by
the applicable cost index in column 2 of Table 5 (from step 3).
For a detached structure on personal-use residential real property,
as described in section 3.05(6) of this revenue procedure, apply the applicable
cost index in Table 6 as follows:
(1) Determine the total square footage of the detached structure.
(2) Determine the size of the detached structure based on the total
square footage described in column 1 of Table 6.
(3) Multiply the total square footage of the detached structure (from
step 1) by the applicable cost index in column 2 of Table 6.
For pressure treated wood decking attached to a personal residence,
as described in section 3.05(7) of this revenue procedure, apply the cost
index in Table 7 as follows:
(1) Determine the square footage of the damaged area of the deck.
(2) Multiply the square footage of the damaged area of the deck (from
step 1) by the cost index in column 2 of Table 7.
SECTION 5. COST INDEXES SAFE HARBOR METHOD EXAMPLES
The following examples illustrate the application of the Cost Indexes
Safe Harbor Method described in section 4.04 of this revenue procedure.
Example 1. Prior to Hurricane Katrina, an individual
purchased a personal residence for $300,000. The personal residence is 2,000
square feet and the personal-use residential real property does not contain
any decking or detached structures. The personal residence was flooded by
nine feet of salt water for over three weeks due to a breach in a levee, causing
the structural connections in the personal residence to corrode to the extent
they must be replaced. The personal residence is located in the Hurricane
Katrina disaster area. Insurance and other reimbursements total $100,000.
The individual obtained from the insurance company a report setting forth
the estimated damage to the personal residence. The individual also obtained
from a licensed contractor a binding contract signed by the contractor and
the individual itemizing the contract price to repair the damage to the personal
residence. The individual chooses to use the Cost Indexes Safe Harbor Method.
Because the salt water corrosion damage to the personal residence falls within
the definition of total loss, as defined in section 3.05(1) of this revenue
procedure, the individual uses Table 1 of the Cost Indexes Safe Harbor Method
to determine the decrease in fair market value of the personal-use residential
real property. The individual multiplies the square footage of the personal
residence by the cost index for a Medium Personal Residence in Table 1, as
follows:
The individual compares the decrease in fair market value, $296,000,
with the basis in the personal-use residential real property, $300,000, and
from the smaller of these two amounts, $296,000, subtracts the insurance and
other reimbursements of $100,000. The individual is entitled to a casualty
loss deduction of $196,000 ($296,000 - $100,000).
Example 2. Assume the same facts in Example
1, except that the individual purchased the personal-use residential
real property twenty years ago for $120,000, and paid no additional amounts
for improvements or remodeling. The individual compares the decrease in fair
market value, calculated using the Cost Indexes Safe Harbor Method in Example
1, with the basis of the personal-use residential real property.
Since the basis of $120,000 is less than the decrease in fair market value,
$296,000, the individual’s casualty loss is limited to the basis of
$120,000. After subtracting insurance and other reimbursements of $100,000
from the basis of $120,000, the individual is entitled to a casualty loss
deduction of $20,000 ($120,000 - $100,000 = $20,000).
Example 3. The individual’s personal residence
is substantially damaged by a storm surge from Hurricane Katrina. The individual’s
personal-use residential real property is located in the Hurricane Katrina
disaster area. The damage falls within the definition of near total loss,
as defined in section 3.05(2) of this revenue procedure, since all of the
drywall, floorings, electrical lines, ducts, plumbing, and other fixtures
need to be replaced. Prior to Hurricane Katrina, the individual purchased
the personal-use residential real property for $190,000 and spent $10,000
for improvements to remodel the residence. Immediately prior to Hurricane
Katrina, the adjusted basis of the property was $200,000 ($190,000 cost +
$10,000 improvements). The personal residence is 2,000 square feet and the
personal-use residential real property does not contain any decking or detached
structures. The individual paid $5,000 to have debris cleared from the personal-use
residential real property. Insurance and other reimbursements total $100,000.
Because the damage to the personal residence falls within the definition
of near total loss, the individual uses Table 2 of the Cost Indexes Safe Harbor
Method to determine the decrease in fair market value of the personal-use
residential real property. Using Table 2 of the Cost Indexes Safe Harbor
Method, the decrease in fair market value of the personal-use residential
real property is determined by multiplying the square footage of the personal
residence by the cost index for a Medium Personal Residence as follows:
Because the individual chooses to use the Cost Index Safe Harbor Method
for determining the decrease in fair market value, the $5,000 debris removal
costs are not added to the safe harbor amount of $240,000. The individual
compares the adjusted basis of the personal-use residential real property
to the decrease in fair market value determined by using the Cost Indexes
Safe Harbor Method. Since the adjusted basis of $200,000 is less than the
decrease in fair market value, $240,000, the individual’s casualty loss
is limited to the adjusted basis of $200,000. After subtracting $100,000,
the amount of insurance and other reimbursements received, from the adjusted
basis of $200,000, the individual is entitled to a casualty loss deduction
of $100,000 ($200,000 - $100,000 = $100,000).
Example 4. The first floor of an individual’s
personal residence was flooded with 4 feet of salt water as a result of a
storm surge during Hurricane Katrina. As a result of the flooding, all of
the flooring and drywall on the first floor needs to be replaced. The second
floor of the personal residence is not damaged. While the personal residence
sustained flooding of more than 1 foot of salt water, it did not sustain damage
that falls within the definition of total loss or near total loss in sections
3.05(1) and (2) of this revenue procedure. Therefore, the personal residence
sustained interior flooding over 1 foot as described in section 3.05(3) of
this revenue procedure. In addition, the pressure treated wood deck attached
to the personal residence was completely destroyed by Hurricane Katrina.
The personal-use residential real property is located in the Hurricane Katrina
disaster area. The personal residence is 2,000 square feet and the personal-use
residential real property does not contain any detached structure. The total
square footage of the flooded rooms on the first floor is 1,000 square feet.
Prior to Hurricane Katrina, the individual purchased the personal-use residential
real property for $200,000. Insurance and other reimbursements total $90,000.
The individual chooses to use the Cost Indexes Safe Harbor Method.
To calculate the decrease in fair market value of the personal-use residential
real property, the individual uses the first column of Table 3 to determine
the size of the personal residence based on the total square footage of the
personal residence. The individual multiplies the flooded square footage
of the personal residence, 1,000 square feet, by $92, the cost index for a
Medium Personal Residence in column 2 of Table 3.
The wood deck is 200 square feet.
Using Table 7, the individual multiplies the square footage of the damaged
area of the deck, 200 square feet, by the cost index of $15 in column 2 of
Table 7.
To determine the total decrease in fair market value of the personal-use
residential real property the individual adds $3,000 to $92,000.
The individual then compares the adjusted basis of the personal-use
residential real property, $200,000, to the decrease in fair market value
determined by using the Cost Indexes Safe Harbor Method, $95,000. Since the
decrease in fair market value of $95,000 is less than the basis of $200,000,
the individual’s casualty loss is $95,000. After subtracting $90,000,
the amount of insurance and other reimbursements, from $95,000, the individual
is entitled to a casualty loss deduction of $5,000 ($95,000 - $90,000 = $5,000).
Example 5. Prior to Hurricane Rita, an individual
purchased personal-use residential real property for $200,000 and spent $5,000
for improvements to the personal-use residential real property. Two trees
fell into the individual’s personal residence during Hurricane Rita,
destroying a portion of the roof. Rain from the hurricane soaked the walls
and flooring of two bedrooms and the living room, necessitating removal and
replacement of drywall and wood paneling, roof panels, trusses, and flooring.
The rest of the personal residence remains undamaged. The personal residence
was not flooded by salt water. Therefore, the damage constitutes structural
damage from wind, rain, or debris, as described in section 3.05(4) of this
revenue procedure. The individual’s personal-use residential real property
is located in the Hurricane Rita disaster area. The personal residence is
2,000 square feet and the personal-use residential real property does not
contain any decking or detached structure. The damaged two bedrooms and living
room total 1,000 square feet. Insurance and other reimbursements total $100,000.
The individual chooses to use the Cost Indexes Safe Harbor Method.
Using Table 4, the percentage of square footage of the personal residence
that was damaged by the hurricane is determined by dividing the total square
footage of the personal residence by the square footage of the personal residence
that was damaged as follows:
The individual uses the cost index in column 2 of Table 4 for 26% to
50% damage and multiplies it by the number of square feet that were damaged.
The roof covering also sustained damage that necessitated replacement
of all roof shingles, felt lining, and flashings. The total square footage
of the ground floor of the personal residence is 2,000 square feet. The total
square footage under the roof, including porches, patios, and overhangs, is
2,200 square feet. The individual multiplies the cost index for a Medium
Personal Residence in Table 5 by 2,200 square feet, the total square footage
under the roof.
The individual adds $12,650 to $132,000 to determine the total decrease
in fair market value of the personal-use residential real property.
The individual compares the decrease in fair market value, $144,650,
with the adjusted basis, $205,000, and from the smaller of these two amounts,
$144,650, subtracts insurance and other reimbursements of $100,000. The individual
is entitled to a casualty loss deduction of $44,650 ($144,650 - $100,000 =
$44,650).
Example 6. Winds from Hurricane Rita caused a tree
to fall across a detached garage located on an individual’s personal-use
residential real property. Prior to Hurricane Rita, the individual purchased
the personal-use residential real property for $200,000. The personal residence
is located in the Hurricane Rita disaster area. The personal residence is
not damaged by Hurricane Rita. The personal-use residential real property
does not contain any decking or other detached structure. The garage suffered
significant damage and requires major rebuilding. The total square footage
of the garage is 400 square feet. The garage was not insured.
The individual chooses to use the Cost Indexes Safe Harbor Method.
Because the garage is a detached structure, as described in section 3.05(6)
of this revenue procedure, the individual uses Table 6 to determine the decrease
in fair market value of the personal-use residential real property. Using
Table 6, the individual multiplies the total square footage of the garage,
400 square feet, by the cost index of $38 in column 2 of Table 6.
The individual’s basis in the personal-use residential real property
is $200,000. The individual compares the decrease in fair market value, $15,200,
with the basis, $200,000. Since the decrease in fair market value is less
than the basis, the individual is entitled to a casualty loss deduction of
$15,200.
Example 7. Winds from Hurricane Wilma blew down
a pine tree that destroyed part of a pressure treated wooden deck attached
to the back of an individual’s personal residence. The personal-use
residential real property is located in the Hurricane Wilma disaster area.
The individual’s basis in the personal-use residential real property
is $200,000. Neither the personal residence nor any detached structure was
damaged by the fallen tree. The deck is 450 square feet. It is necessary
to rebuild one-half of the deck. The remaining half of the deck is not damaged,
and remains structurally sound.
The individual chooses to use the Cost Indexes Safe Harbor Method.
Because the deck is wood decking as described in section 3.05(7) of this revenue
procedure, the individual uses Table 7 to determine the decrease in fair market
value of the personal-use residential real property.
The square footage of the damaged area of the deck is one-half of 450
square feet, which is 225 square feet. Using Table 7, the individual multiplies
the square footage of the damaged area of the deck, 225 square feet, by the
cost index of $15 in column 2 of Table 7.
The individual compares the decrease in fair market value, $3,375, with
the basis, $200,000. Since the decrease in fair market value is less than
the basis, the individual is entitled to a casualty loss deduction of $3,375.
SECTION 6. REDUCTION FOR NO-COST REPAIRS
Under § 165(a), a casualty loss must be reduced by insurance
or other amounts received, such as amounts given to an individual to repair
the damage to the individual’s property due to the casualty. This includes
the value of repairs to, or rebuilding of, the individual’s personal-use
residential real property provided by another party at no cost to the individual
(“no-cost repairs”), such as the repair or rebuilding of an individual’s
personal residence by volunteers. No-cost repairs include repairs made for
a de minimis or token cost, donation, or gratuity.
An individual who uses the Cost Indexes Safe Harbor Method provided
in section 4.04 of this revenue procedure to determine the decrease in the
fair market value of the individual’s personal-use residential real
property must reduce the loss, determined using the Cost Indexes Safe Harbor
Method, by the value of any no-cost repairs. For this purpose, the value
of a no-cost repair is based upon the total square footage completely repaired
at no cost to the individual. The total square footage completely repaired
at no cost to the individual is multiplied by the same cost index the individual
used to determine the decrease in the fair market value of the individual’s
personal-use residential real property. This amount is then subtracted from
the loss determined under the Cost Indexes Safe Harbor Method.
SECTION 7. PERSONAL BELONGINGS SAFE HARBOR METHOD
.01 Certain personal belongings. Except as provided
in section 7.02 of this revenue procedure, an individual may use the safe
harbor method in this section 7.01 to determine the fair market value of the
individual’s personal belongings immediately before a 2005 Gulf hurricane
in order to compute a casualty or theft loss. If an individual chooses to
use the Personal Belongings Safe Harbor Method, the individual must apply
that method to all personal belongings for which a loss is claimed under § 165
except those specifically excluded in section 7.02 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-hurricane fair market value is 10% of the current replacement cost under
this safe harbor method.
To determine the casualty or theft loss deduction for personal belongings
that were damaged, destroyed or stolen:
(1) Determine the decrease in the fair market value of each personal
belonging by subtracting the fair market value of the personal belonging immediately
after the hurricane from the fair market value of the personal belonging immediately
before the hurricane, determined as described above. If a personal belonging
was destroyed or stolen as a result of a 2005 Gulf hurricane its fair market
value after the hurricane is zero.
(2) Determine the basis of each of the personal belongings (generally
its cost).
(3) Compare the decrease in fair market value (from step 1) to the basis
of the personal belonging (from step 2). From the lesser of the basis or
decrease in fair market value, subtract any insurance or other reimbursements
the individual receives or expects to receive for the personal belonging.
.02 Exclusions. An individual may not use the Personal
Belongings Safe Harbor Method for a boat, aircraft, mobile home, trailer,
vehicle, or an antique or other asset that maintains or increases its value
over time. For purposes of this revenue procedure, a vehicle is an automobile,
motorcycle, motor home, recreational vehicle, sport utility vehicle, off-road
vehicle, van, or truck.
An individual may determine the pre-hurricane value of a boat, aircraft,
mobile home, trailer, or vehicle by consulting established pricing sources.
See Rev. Rul. 2002-67, 2002-2 C.B. 873.
.03 Example. An individual’s personal belongings
included a chair destroyed by Hurricane Wilma within the Hurricane Wilma disaster
area. The individual purchased the chair for $70 four years prior to Hurricane
Wilma. The cost to replace the chair with a new chair is $100. The chair
is not insured.
Using the Personal Belongings Safe Harbor Method, the individual computes
the fair market value of the chair immediately before the hurricane by multiplying
the current replacement cost of the chair, $100, by the applicable percentage
of replacement cost from the Personal Belongings Valuation table, 60%:
The individual determines the decrease in the fair market value of the
chair by subtracting $0, the fair market value of the chair immediately after
the hurricane, from $60, the fair market value of the chair immediately before
the hurricane.
The individual compares the basis of $70 to the decrease in fair market
value of $60. Since the decrease in fair market value is less than the basis,
the individual is entitled to a casualty loss deduction of $60.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective for losses that arose in the (1)
Hurricane Katrina disaster area on or after August 25, 2005, and are attributable
to Hurricane Katrina; (2) Hurricane Rita disaster area on or after September
23, 2005, and are attributable to Hurricane Rita; and (3) Hurricane Wilma
disaster area on or after October 23, 2005, and are attributable to Hurricane
Wilma.
SECTION 9. REPORTING ON FORM 4684
Individuals who use one of the personal-use residential real property
safe harbor methods provided in section 4 of this revenue procedure should
attach a statement to Form 4684, Casualties and Thefts,
stating that the individual used “Rev. Proc. 2006-32 to determine the
individual’s Hurricane Katrina, Rita, or Wilma (as applicable) casualty
loss deduction and list the specific safe harbor method used, including the
table numbers, where applicable (for example, “I/We used Rev. Proc.
2006-32 in determining my/our Hurricane Katrina casualty loss deduction using
the Cost Indexes Safe Harbor Method, specifically Tables 3, 6, and 7.”).
Also, in completing Form 4684, if an individual uses any of the personal-use
residential real property safe harbor methods in section 4 of this revenue
procedure, for each of those properties do not enter an amount in line 5 or
6 and enter the decrease in fair market value determined under the safe harbor
method on line 7 and mark “Revenue Procedure 2006-32” in red ink
on the top of the Form 4684.
SECTION 10. PAPERWORK REDUCTION ACT
The collection of information contained in this revenue procedure has
been reviewed and approved by the Office of Management and Budget in accordance
with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-0074.
Please refer to the Paperwork Reduction Act statement accompanying Form 1040, U.S.
Individual Income Tax Return, for further information.
The principal author of this revenue procedure is Norma Rotunno of the
Office of Associate Chief Counsel (Income Tax & Accounting). For further
information regarding this revenue procedure, contact Ms. Rotunno at (202)
622-7900 or Sharon Hall at (202) 622-4950 (not a toll-free call).
Internal Revenue Bulletin 2006-28
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