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Some Relief after hurricane Sandy

by: Ronald S. Cook, LLM, JD, MBA and Michael DeStefano, CPA, CVA

 TAX CONSIDERATIONS

Did you experience a loss, to your residence, as a result of Hurricane Sandy? I experienced first-hand devastation from this storm to my home and I'm writing this article to let you to know that, in addition to any assistance that you might receive from FEMA and insurance, you could be entitled to a deduction on your tax return as well.

The IRS allows a special deduction to individuals that have an unreimbursed loss from this storm. This loss is explained more fully in the IRS Publication 547 "Casualties, Disasters, and Thefts". The loss to property experienced by Hurricane Sandy falls under the definition of a casualty loss. What is allowed is a deduction equal to the decrease in the fair market value of your property.

There are two methods to determine this decrease. The first one, which I believe most people will NOT use, is to obtain an appraisal of the property before and after the storm damage. This method will probably become cumbersome and costly. Therefore, the second method probably will be more practical and easier to use. This method allows you to determine the decrease to the fair market value of your property by using the cost of the cleaning up and or making repairs to the property. This method is available to those who meet the following conditions:

  • You actually make the repairs to the property,
  • The repairs are necessary to bring the property back to its condition before the storm,
  • The amount spent on the repairs is not excessive,
  • The repairs take care of the damage only and
  • The value of the property after the repairs is not, due to the repairs, more than the value of the property before the loss.

This may see confusing, but the most important thing for you to do now is to save receipts for everything you do. Also remember that paying for the repairs in cash can become problematic so avoid where possible. If this is necessary, I would recommend getting the person doing the work to sign a receipt that states what work was done and the amount of money received. Inferior documentation could make it needlessly difficult (and perhaps impossible) for you to justify the deduction to the IRS in case of an audit (this could result in the deduction not being allowed). The deduction is first calculated on Form 4684, and any allowable deduction is carried to Schedule A (Itemized Deductions.)

Our region was declared a Federal Disaster Area due to the storm which gives you have an option of waiting until you file your 2012 return to take the deduction. Alternatively, you could amend your 2011 return and take the deduction on the amended return. Although you probably will not have all the information necessary to calculate your deduction until you are ready to file your 2012 tax return anyway, filing an amended 2011 return may be beneficial depending on the amount of income you expect in both 2011 vs. 2012.

The deduction is limited to the amount above 10% of your adjusted gross income. Therefore, if you have more income in 2012 than 2011, the reduction of your deduction will be less if you file an amended return.

The discussion herein does not cover all the various facets of the casualty loss deduction, but only outlines some of the things you need to know. You should seek the counsel of your tax professional for further details and to see how this deduction may benefit you. Please contact me with any accounting or tax questions or if you'd like me to email to you any forms.

Sincerely, Michael DeStefano, CPA, CVA

DEBT CONSIDERATIONS

Although I was not impacted nearly as hard as my friend Michael DeStefano, I have been busy providing legal advice on things that can be done post-disaster. For those who were impacted harder by the storm, and who might be exploring solutions beyond FEMA, insurance claims, and tax deductions, perhaps a bankruptcy might play a role for a fresh financial start. If you know of anyone that might benefit from this article, please forward it along.

I've discussed, with numerous hurricane Sandy victims, a wide range of losses. Before the storm, many people were "under water" on their mortgage meaning they owed more money than the house was worth. This is largely because over the past four years, we've seen property values plummet between ten to forty percent due to the economy coupled with basic supply and demand. As a result, many borrowers have been able to take the arrearage (of their missed payments) and essentially refinance the terms into a currently popular solution called a loan modification. This is a common solution because lenders are not anxious to foreclose on properties where the lender knows the lender will take a loss in a foreclosure sale

After hurricane Sandy, there is a second meaning to being "under water" since homes were literally under salt water. The water damage has caused problems ranging from light flooding to entire devastation. Many people did not have flood insurance. FEMA can only do so much. I've had people tell me FEMA is covering $14,000 where the quote for a full repair was actually $100,000. Some people have tapped into savings, borrowed from friends and relatives, and some have drawn from their IRA which where at the present moment comes with a 10% early withdraw penalty.

If you owe more on a house than the house is worth, you can't sell the property because you can't make the lender whole unless you come out of pocket for the difference. That is why the market has seen (even before the storm) an increase in short sales which is where the lender agrees to sell the home to a buyer that demands a discount. The lender is not paid by the buyer the full sum of the outstanding mortgage that the seller owed, however, the lender no longer needs to worry about finalizing a foreclosure which takes time and money. The buyer gets a discount. The seller gets out.

Many short sale buyers are actually investors that are looking to put some "sweat equity" (spend money themselves to repair or improve the things most likely to increase the value) into a home and sell it for a higher price perhaps sooner rather than later. Water damaged homes, in devastated areas that probably won't be able to get affordable flood insurance into the foreseeable future, are not going to attract short sale buyers at least in the near future. That limits a short sale as a solution to the debt problem.

When mortgage payments are not made, the lender can foreclose. When a foreclosure occurs, a calculation is performed to find out the debt deficiency. A deficiency judgment is obtained by the lender which can then use to pursue the borrower for the deficiency debt. Even after a lender sells a property, the original owner is still liable for the lender's losses. However, a bankruptcy changes that. If a borrower files a chapter 7 bankruptcy, the individual can write off the personal exposure remaining on the house and obtain a fresh start. When a lender writes off a debt, a 1099-c can be issued by the lender indicating forgiveness of debt. Without a bankruptcy, this becomes a tax liability to the borrower. In a bankruptcy, the borrower can file IRS Form 982 indicating that due to the bankruptcy, the borrower can eliminate the tax impact of any lender issued 1099-c.

Form 982 can also be beneficial in non-bankruptcy situations. Suppose you hire my law firm for debt negotiation services in negotiating down your credit card debts. Suppose we achieve getting $70,000 written down to $20,000. The credit card company can issue a 1099-c for their $50,000 loss which is debt forgiveness. Where a borrower can state they are insolvent on form 982, this would eliminate the negative tax bite of any 1099-c even where no bankruptcy was filed.

If a home is worth saving, and if a borrower qualifies for a chapter 13 bankruptcy, a lender can be forced to take payments over as many as sixty months to deal with the property debt arrearage. As a simple example, suppose a dozen payments are missed and each payment was $2,500. This amounts to $30,000 of arrearage which could be paid as $500 per month over sixty months in a chapter 13 bankruptcy. Note that the borrower would also need to resume the original regular monthly mortgage of $2,500 PLUS this additional $500 each month. Many people cannot afford the additional payment, so this is not always the solution to the problem.

There are other mortgage debt solutions including, but not limited to, reinstating a loan. This could occur where someone borrows from a retirement account or a relative to get back on track with a mortgage arrearage. Some lenders will also permit an arrearage to be paid over a six month reinstatement time period.

If you know someone that might need some help, in any of the areas discussed above, please forward this article. As with all tax and legal advice, it is suggested that you consult a licensed professional to analyze the specifics of your particular situation. Please contact me with legal questions.

Sincerely, Ronald S. Cook, LLM, JD, MBA

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