Casualty Loss
Casualty Loss Can Generate Massive Tax DeductionsA casualty loss may occur as a result of a flood hurricane tornado mudslide or other natural disaster. The intuitive thought pattern is: My apartment complex worth 5000000 suffered major damage totaling 1500000 for repairs and rent loss. Fortunately I was completely covered for both physical damage and rent loss other than a small deductible. There is clearly no casualty loss I can claim as a tax deduction right?
Tax deductions are the basis for tax reduction. Tax deductions reduce taxable income but do not directly reduce federal income taxes. For example 100000 of tax deductions reduces federal income taxes by 35000 100000 X 35 assuming a 35 tax rate. Most tax deductions require a cash expenditure labor material supplies utilities etc. A current period cash expenditure is not required for some real estate tax deductions and may not be required for a casualty loss. Most real estate owners and investors do not consider casualty losses as a source of tax deductions.Few investors claim the casualty loss tax deduction the federal income tax code allows them. Lets review the criteria for a casualty loss tax deduction and the thought process regarding acquisition of a property that has suffered a casualty. Real estate owners suffer a casualty loss when the market value immediately after the casualty plus insurance proceeds is less than the market value immediately before the casualty. The complex issue is how to value the property immediately after the casualty. Lets consider a 1story suburban office park in Mississippi which suffered 3feet of flooding due to Hurricane Katrina. Lets further assume: 1 8 feet of sheet rock must be replaced in the entire property to rebuild 2 although the property was 90 occupied before the flood occupancy is expected to only be 5 while rebuilding occurs 3 stabilized occupancy after renovation is not clear since some businesses may not return 4 construction will take 1218 months due to the labor constraints and 5 the owner has casualty insurance to rebuild but did not have rent loss/business interruption insurance. It is clear the market value after the casualty is less than the market value before the casualty less construction costs. Other factors to consider are: rent loss market risk that not enough tenants will be available after construction is completed cost of construction management a illiquid market with few buyers just after the casualty construction risk interest rate risk rates could rise during the construction period negatively affecting value risk that operating expenses could increase during the construction period perhaps insurance and compensation for entrepreneurial effort to induce a buyer to coordinate labor capital management and compensation for capital during the reconstruction and releasing process. A careful analysis by an appraiser might show the improvements have no value after the flood. In appraisal assignments performed by the writer a casualty loss of 1030 of the market value before the casualty has occurred in a straightforward defensible analysis is typical. This can generate a meaningful casualty loss and tax deduction. For example a property with a market value of 5000000 suffers a 30 casualty loss. While the casualty is a serious hardship for the owners the 1500000 5000000 X 30 tax deduction will mitigate the financial loss. Congress provided a casualty loss tax deduction to encourage investment in real estate. If you have the misfortune to suffer a casualty loss take the helping hand offered by congress and take the tax deduction. Click here for a FREE preliminary analysis of income tax savings for your property. Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of cities where cost segregation generates meaningful tax deductions. City:
- Memphis TN
- San Francisco CA
- New Orleans LA
- New York NY
- Hartford CT
- Las Vegas NV
- Los Angeles CA
- Atlanta GA
- Orlando FL
- Miami FL
- Louisville KY
- Salt Lake City UT
- Boise ID
- Lakeland FL
- Wichita KS
- McAllen TX
- Columbus OH
- Ft. Lauderdale FL
- San Antonio TX
- Durham NC
- Allentown PA
- Youngstown OH
- Little Rock AR
- Greensboro NC
- Greenville SC
- Kansas City MO
- Raleigh NC
- San Jose CA
- Palm Bay FL
- Honolulu HI
- Regional mall
- Service station
- Drugstore
- Night club
- Supermarket
- Racket club
- Auto service garage
- Airplane hangar
- Nursing home
- Subsidized housing
- Nondurable good wholesalers
- Durable good wholesalers
- Day care facilities
- Computer and electronic manufacturing
- Health care facilities
- Chemical manufacturing
- Printing activities
- Warehousing and storage
- Electronic and appliance stores
- Apparel manufacturing
O’Connor Associates is a national provider of commercial property real estate consulting services including cost segregation studies due diligence income tax abandonment studies business personal property valuations commercial appraisals feasibility studies highest and best use analyses and lease audits.
Our services benefit owners of all commercial property types including multifamily housing retail stores hospitals hotels industrial properties manufacturing facilities medical offices commercial offices restaurants selfstorage units shopping malls shopping plazas and warehouse/distribution centers.
About the writer: Patrick C. O’Connor has been president of O’Connor Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also a registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes. He continues to set the standard in direction and quality of our appraisal products adding services ranging from business valuations and business appraisals to cost segregation analysis for income tax reduction.
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