Presidentially Declared Disaster Areas Receive Special Tax Breaks

Following the September 11, 2001 terrorist attacks, President Bush declared five New York counties and Arlington County, Virginia (where the Pentagon is located) federal disaster areas. Thus far in 2001, a total of 38 locations in 29 states and Puerto Rico have been declared federal disaster areas. Beyond the enormous personal loss, many people have been left with severely damaged or destroyed homes and businesses. Some have lost everything they owned. If you were affected by a disaster this year, there are several provisions in the tax law that may provide relief.

Extended tax deadlines and interest abatement.

The IRS is authorized to postpone the deadlines for filing and paying taxes by up to 120 days in a Presidentially declared disaster area. Also, the IRS must remove interest penalties that result from your delay in paying any tax during the extended filing period. Special tax relief was recently announced for the victims and those directly affected by the September 11 terrorist attacks (see What's New in Taxes).

Faster refund.

Taxpayers suffering losses in a federal disaster area have a choice of which tax year to deduct the casualty loss. You may deduct it in the year the loss occurs, or it can be claimed on your prior year's tax return. Amending your prior year's return may allow you to get much-needed cash now instead of waiting to deduct the loss on your 2001 return.

Tax-free gain.

If the insurance proceeds exceed the tax basis of your property, you will end up with a casualty gain. Casualty gains in federal disaster areas receive special tax treatment. For example:

• Individuals may qualify for up to a $250,000 gain exclusion ($500,000 for married couples) on their principal residence. That's because the destruction of the residence is treated as a "sale" for tax purposes.
• No gain is recognized on the insurance reimbursement for the contents of a building as long as those contents were not separately listed on the insurance policy.
• If you replace your property with similar property within four years, you may be able to avoid or postpone paying tax on some or all of the casualty gain.

If you suffered a casualty this year, give us a call to discuss the best course of action in your situation. We are here to help.

Related Information:
        Ideas and Information About Taxes
        Selecting a Tax Advisor
        Tax Services

© Copyright 2001 Raymond S. Kulzick. All rights reserved. 010930.

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