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Guidance for handling your first casualty return
If this is your first year preparing returns for clients with casualty gain/loss, you may be a bit overwhelmed (I know we certainly were in 2017 in the North Bay when we had thousands of clients lose their homes). We put together this guide to help you navigate the process. This tax situation is governed mainly by IRC 1033.
Let’s say that Chris and Pat owned a home in Los Angeles. The home was their personal residence and had no business use. They did not make any improvements to the home. The home was destroyed in a fire in January 2025. The fire was declared a Presidential disaster.
Step 1: Determine the basis for the gain/loss Calculation.
- C&P purchased the house for $450,000 in 2012. They made no improvements.
- Determine the Fair Market Value of the property before the disaster and the Fair Market Value of the property after the disaster. The IRS wants appraisals for these figures. In our case, C&P had an appraisal on the property right before the fire due to a refinance. So, the FMV of the property before the fire was $700,000. The Fair Market Value of the property after the fire is $200,000 (the value of the land).
- Next, determine the smaller of the basis in the property or the change in fair market value (in our practice over the past few years the basis has always been smaller than the change in FMV).
- Basis: $450,000
- Reduction in FMV: $700,000 – $200,000 = $500,000
- The smaller of those two figures is $450,000.
Step 2: Determine the insurance reimbursement
- The insurance company will provide a summary sheet showing the insurance proceeds by type of coverage. In our case Chris and Pat received $600,000 of insurance for the dwelling and $300,000 of insurance proceeds for contents (aka personal property). The insurance checks were received in February 2025.
Step 3: Determine the gain/loss
- For the home the gain is $600,000 (insurance proceeds) – $450,000 (cost basis) = $150,000 gain on the casualty. The gain is realized in 2025 because they received the check from the insurance company in 2025.
- For the personal property, no gain is recognized for insurance proceeds for unscheduled personal property in a federally declared disaster. So, C&P get the $300k of contents insurance tax-free. (1033(h)(1)(A)(i))
Step 4: What do do with the gain?
- C&P have a few options. Since they lived in the home as their personal residence for 2 of the past 5 years they qualify for the Sec 121 homeowner’s exclusion. So they can exclude up to $500,000 of gain.
- Also, since the fire qualifies as a casualty they can defer paying tax on the gain if they reinvest the insurance proceeds into a new home (1033)(a)(2)). They can do this by buying a new home or rebuilding their home on their lot and using all the proceeds within the prescribed timeframes.
- Or, if their gain had been bigger, they can use both Sec 121 and Sec 1033 meaning they could exclude $500k of gain using Sec 121 and then the rest of the gain can be deferred using 1033 (See our article about using both of those here.)
- Since this was a personal residence in a Presidentially-declared disaster, the property has to be replaced within 4 years from the end of the tax year when gain was realized (1033(h)(1)(B)). C&P received the insurance check in 2025 so their gain year is 2025. They have 4 years from 12/31/2025 to replace the property.
Step 5: How to report on the tax return?
- If you want to exclude using Sec 121 you just don’t report the gain on the tax return (unless you received a 1099-S).
- If you want to exclude using Sec 1033 then you just don’t report the gain on the tax return, However we recommend you attach an election statement because this reminds the tax preparer that you have to be sure the taxpayer reinvests the proceeds in the appropriate timeframes to qualify for the 1033 deferral. Then once the property has been replaced, attach another statement showing the replacement property and the gain deferral calculation.
Sales Tax Relief for LA Fire Victims
Many taxpayers who live and work in Los Angeles or Ventura County now have until April 30, 2025 to file their CDTFA tax returns and make payments. This relief is available for most of the CDTFA administered programs including sales tax, use tax, lumber fees, Hazardous Waste Fees, Cannabis tax, and much more.
Here is a link to the CDTFA website with more information and all the programs covered under this relief provision: CDTFA Emergency Tax Relief
Insurance has sent me a check for the loss of my house. Is it taxable?
The answer to this and most tax questions is: It depends. There is a potential for the insurance payments to be taxable and it depends on the facts and circumstances of each case.
Casualty Loss: If a Home Owner was uninsured (or under-insured) and lost their house, they could have a sizable casualty loss. A casualty loss is taken on your tax return.
Casualty Gain: If they were insured and if the insurance award is greater that the home owner’s basis (original purchase price plus improvements) then there is a possible taxable gain. The insurance payment for the loss of the house is considered the Sales Price. Comparing the Sales price to the Basis determines if there is a Taxable Gain.
WAIT, YOU ARE NOT LISTENING. THERE WAS NO SALE.. MY HOUSE WAS DESTROYED IN THE FIRE.
Yes, you are right. It seems unintuitive but this is the way the tax code works. When you get insurance money it is treated like a sale of your property.
Example: If you bought your house for $200,000 and you receive $500,000 in insurance benefits, there is a $300,000 gain.
SO, DO I HAVE TO PAY TAXES ON THAT GAIN?
Luckily, there are two IRS code sections that can reduce or eliminate the gain from the insurance received. Section 121 covers the exclusion of Gain from a Principle Residence and Section 1033 covers Involuntary Conversions which are losses that happen as a result of events such as Fire, Earthquake, Flood, etc.
Using Section 121
Since the destruction of your personal residence is treated as a sale of property, for purposes of the section 121 exclusion if the taxpayer otherwise qualifies (that is, during the five-year period ending on the date of the fire, the home has been owned and used by the taxpayer as their principal residence for two years or more) part of the gain ($250,000 for single taxpayers and $500,000 for married filing jointly taxpayers) may be excluded.
Example: Using the example above, if you have a $300,000 gain but you were single and qualified for the Sec 121 exclusion, then you could exclude $250,000 of the $300,000 gain. Leaving you with a gain of only $50,000.
Using Section 1033
This section allows you to defer recognition of the gain on your tax return assuming the tax payer reinvests the proceeds in a replacement property within defined time limits. Note: This is just a deferral of the gain. The basis of the replacement property is adjusted for the deferred gain and thus when you sell the property, you could recognize the gain at that time. The rules around this are quite complex, thus we have not gone into all the details in this article.
The calculations around the casualty gain or loss are complicated and using the Sec 121 and Sec 1033 exclusions are even more complicated and there are special rules if your loss is due to a federal disaster (such as the LA fires) thus we recommend that you consult with your Enrolled Agent or other tax professional when preparing your tax return to ensure you get all the tax benefits you deserve.
My property tax is due, but my house burned down in the fire. Do I still have to pay?
UPDATE on 1/16/2025 for some zip codes – Governor Newsom issued an executive order which allows property owners in a select set of zip codes to postpone payment of their property taxes until April 10, 2026 without incurring any penalties. The zip codes covered are: 90019, 90041, 90049, 90066, 90265, 90272, 90290, 90402, 91001, 91040, 91104, 91106, 91107, 93535, or 93536.
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If your house was destroyed due to a calamity, you may be eligible for property tax relief under Revenue and Taxation Code section 170. The County will reassess the value of your property and thus reduce your property tax amount that is due.
Due to the extensive damage of the LA fires, we expect the Los Angeles Assessor’s office to automatically re-assess impacted properties. If they do not, then you can file a form with the county.
To qualify for a calamity adjustment, the property must have suffered more than $10,000 worth of damage and the owner must file a claim with the Assessor within twelve (12) months of the date of calamity. This link has more information about filing a claim in Los Angeles County: Property Relief for Properties Impacted By a Disaster.
The form to file a claim:
Tax Relief for LA fire victims
The IRS and California announced tax relief for people affected by the fires in Los Angeles.
Who Qualifies?
- Households that live or have a business in Los Angeles County qualify for Federal Relief.
- Households that live or have a business in Los Angeles County and Ventura County qualify for California Relief.
- Note: Ventura County is not currently listed in the FEMA disaster declaration so they do not get automatic relief. They can be added later.
What is the Relief?
- Most tax actions that would normally be due between January 7, 2025 and October 15, 2025 are now due on October 15, 2025.
What Tax Actions are included?
- Estimated tax payments that would be due on 1/15, 4/15. 6/15, and 9/15 are now due on 10/15/25.
- Income tax returns that would be due in that time period are now due on 10/15/25.
- Payroll and excise tax returns that would be due in that time period are now due on 10/15/25.
- IRA and HSA contributions are now due on 10/15/25.
- PTET payments that would be due on 3/15 or 6/15 are now due on 10/15/25.
- See Rev. Proc. 2018-58 for other items included in the postponement.
- Note: This relief does not include payroll tax deposits or the deadline for filing W2s, 1099s and similar reports.
FVT payments for most taxpayers can be excluded from income
President Biden has signed HR 5863 which excludes the PG&E Fire Victims Trust payments from Federal income for most taxpayers. (Note: California already excluded the payments from income so this bill covers Federal taxes only).
Key features of the law:
- If an individual received a qualified wildfire relief payment in calendar years 2020 through 2025, it may be excluded from income.
- A qualified wildfire relief payment is any amount received by an individual as compensation for losses, expenses, or damages, personal injury, death, or emotional distress incurred as a result of a qualified wildfire disaster to the extent they were not compensated for by insurance/other.
- This tax relief applies to individuals. So payments received by a Partnership or Corporation likely do not qualify for this relief.
How to get your money back
- If you reported the FVT payment as income you can amend your prior year returns to get a refund.
- For most 2020 and 2021 returns you have until 12/12/25 to file an amended returns.
- For 2022 and 2023 returns the timing is determined by the normal refund statute of limitations rules.
New Hope around getting Federal Tax Relief for FVT payments
Last year the House passed the Tax Relief for American Families and Workers Act which would have made Fire Victims Trust payments non-taxable at the Federal level, but that bill is stalled in Congress for political reasons.
The House just passed another bill focused just on Disaster Relief. The Federal Disaster Tax Relief Act of 2023 (H.R. 5863) is on its way to the Senate and we are told that there is support in the Senate to pass this disaster relief bill. The provisions of this bill include:
- Allow taxpayers who were subject to damages from hurricanes, wildfires and other federally declared disasters that occurred after February 25, 2021, to claim disaster-related losses without itemizing such deductions;
- Remove the requirement that such losses must exceed 10% of a claimant’s adjusted gross income to claim the disaster-related loss;
- Exclude from gross income any amount received by an individual after 2019 and before 2025 as compensation for expenses or losses incurred due to a qualified wildfire disaster, to the extent the losses were not already covered by insurance or other sources; and
- Exclude specified relief payments received by taxpayers for losses resulting from the East Palestine, Ohio, train derailment on February 3, 2023.
Federal Tax Relief may be coming to Settlement Recipients
Congress has announced it has reached a budget deal that includes Federal tax relief for individuals who received settlement income related to wildfires. As of this writing, the bill has not passed yet, but assuming it does, The Tax Relief for American Families and Workers Act of 2024 will provide:
Extension of Rules for Treatment of Certain Disaster-Related Personal Casualty Losses
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 provided tax relief to certain individuals in qualified disaster areas. The relief included special rules for qualified disaster related personal casualty losses, including eliminating the requirement that casualty losses must exceed 10 percent of adjusted gross income (AGI) to qualify for the deduction, requiring losses to exceed $500 per casualty in order to be deductible, and allowing taxpayers to claim the casualty loss deduction “above the line,” i.e., without itemizing their deductions.
This section extends the rules for the treatment of certain disaster-related personal casualty losses as passed in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, including any area with respect to which a major disaster was declared by the President during the period beginning on January 1, 2020, and ending 60 days after the date of enactment of the proposal if the incident period of the disaster (as specified by the Federal Emergency Management Agency as the period during which the disaster occurred) begins on or after December 28, 2019, and on or before the date of enactment of the proposal.
Exclusion From Gross Income for Compensation for Losses or Damages Resulting From Certain Wildfires
In general, gross income is defined as income from whatever source derived. This section excludes from gross income any amount received by or on behalf of an individual as a qualified wildfire relief payment. It defines “qualified wildfire relief payment” as any amount received by or on behalf of an individual for expenses, damages, or losses incurred as a result of a qualified wildfire disaster, but only to the extent any expense, damage, or loss is not compensated for by insurance or otherwise. This section also includes provisions to deny double benefits.
This section applies only to qualified wildfire relief payments received by an individual during taxable years beginning after December 31, 2019, and before January 1, 2026.
Once we get the actual Internal Revenue Code we can confirm how and who this will benefit.
New Disaster Relief for many Californians
For Federal Income Tax Returns
The IRS announced that taxpayers who live in counties designated by FEMA as disaster areas because of the January 2023 storms now have more time to file and pay their Federal Income Tax Returns.
As of the date of this writing eligible taxpayers for the Federal postponement are individuals and businesses that are located in Alameda, Colusa, Contra Costa, El Dorado, Fresno, Glenn, Humboldt, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Tulare, Ventura, Yolo and Yuba counties. See the IRS news release for updates to this list: HERE
Eligible taxpayers for Federal purposes have until October 16th to:
- File their 2022 income tax returns (individual, business, and tax-exempt entities)
- Pay their 2022 Q4 Estimate
- Pay their 2022 Balance Due
- Pay their 2023 Q1, Q2, and Q3 Estimates
- Make 2022 IRA contributions (be sure to check with your financial institution that they will accept payments after 4/18/23)
- Make 2022 HSA contributions (be sure to check with your financial institution that they will accept payments after 4/18/23)
Note: Four more counties were added as of 3/9/23. Those counties are: Imperial, Kern, Plumas, and Sierra. But their postponment covers only deadlines that ocurred after March 9th (so it is pretty much everything listed above except the 2022 Q4 estimate). To see the latest News Release, click HERE.
For California Income Tax Returns
See the California news release for updates to this list: HERE.
Eligible taxpayers for the California Postponement have until October 16th to:
- File their 2022 income tax returns (individual & business returns normally due on 3/15 or 4/18)
- Pay their 2022 Q4 Estimate
- Pay their 2022 Balance Due
- Pay their 2023 Q1, Q2, and Q3 Estimates
- Pay their PTET payments (normally due 6/15)
Should you wait?
There are two steps to your tax return: Filing and Paying
- Filing: Your tax preparer may have other work already planned for after April 15th (the normal deadline) so we encourage you to file earlier rather than later.
- Paying: If you are discliplined with money, it does make sense to delay making the payments. Save that cash and earn interest on your money until the payments are due on October 16th. If you are not disciplined with money then you may want to make the payments on the regular schedule.
Tax Relief for California Storm Victims
The IRS has announced that due to the winter storms, most individuals in California will have more time to file and pay. California conforms to this postponement.
WHO CAN GET RELIEF
If you live or work in the disaster area you are eligible for this tax relief, you do not have to be a victim of a flood or mudslide. Individuals who can receive this relief are:
- Principal residence in the disaster area
- Business principal place of business in the disaster area
- Relief worker with recognized organization in the disaster area
- Records are located in the disaster area
- Individual visiting the disaster area who was killed or injured due to the disaster
- Spouse of an affected tax payer
COUNTIES THAT QUALIFY
Here is the list of counties that qualify as disaster areas as of the publish date of this article: Alameda, Colusa, Contra Costa, El Dorado, Fresno, Glenn, Humboldt, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Tulare, Ventura, Yolo and Yuba.
WHAT IS THE RELIEF
The tax relief available is, any of these actions below that were due on or after January 8, 2023 are now postponed to May 15, 2023. This includes
- Filing of Income Tax and Payroll Tax returns (Form 1040, 1041, 1120, 1120S, 1065, 706, 990, 940, 941)
- Any estimated tax payments that were due in that period (this includes 2022 Q4 and 2023 Q1 estimates for calendar year taxpayers)
- IRA and HSA contributions
- Claims for refund
- Hundreds of other actions: To see the complete list of actions that are postponed, see Treas Reg 301.7508A-1(c)(1) and Rev Proc 2018-58
- Tax relief does not postpone the due date for W2s and 1099.
SHOULD I WAIT?
Keep in mind that just because the government has given you more time does not mean that your tax preparer or the brokers who accept IRA and HSA payments can handle the postponement. Many tax preparers already have other work scheduled after 4/18 and most software is coded for a 4/18 deadline so there can be administrative issues with trying to do things after the original due date. So be sure to check with the professionals who support you if you need more time to file/pay.