Tax Savings from Texas Winter Freeze

28 Jul 2021 Tax Savings from Texas Winter Freeze

Authored by Haynie & Company Partner Bernard Abercrombie, CPA

In February of this year, Texas suffered through an unprecedented winter freeze. Many suffered damage because of the freeze, all the way from sprinkler and vegetation damage up to burst pipes requiring major renovations. Much of the damage may not have been fully covered by insurance.

IRS Declares Natural Disaster

The winter storm resulted in Texas being designated as a federally declared natural disaster area. The significance of this is extremely important for tax purposes. It opens the door for claiming a casualty loss for damages over $500 being claimed as a loss on your 1040. A relatively unusual quirk in the law allows for claiming that loss on either your 2020 or your 2021 tax return. A previously filed 2020 tax return could be amended to claim the loss for 2020, if that turns out to be more advantageous.

Without spending a lot of time on technical details, the loss is allowed to the extent of the decrease in the fair market value of the property from before the casualty compared to after the casualty reduced by any insurance proceeds and $500. We’ve had success in claiming the loss as the cost of putting the property back in its’ previous condition.

Examples of Tax Impact

Here is a simple example related to the winter freeze. If the freeze resulted in broken sprinkler pipes and loss of plants and trees and it cost $2,800 to repair and replace those without any insurance reimbursement, the loss allowed would be the $2,800 less the $500 disallowed by law, or $2,300. Once again, this loss can be claimed on either your 2020 or 2021 tax return.

It should be noted that expenditures that result in an “improvement” to the property must be capitalized and are not allowed as part of the casualty loss. An example would be if you had carpeting as flooring before the casualty and replaced it with hard wood floors, that would be an improvement and some or all of that would not be included in the casualty loss calculation.

As always, please consult your Haynie CPA for specific details of your situation.

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