The Housing Scene

Softening the Blow From a Disaster

If your house is damaged in a fire, hurricane, flood or other disaster, you should call your insurance company first thing. But after that, call your local appraiser’s office.

If you do, the value of your property could be reduced appreciably in the tax man’s eye, and as a result, your property tax could go down significantly. If you don’t, “your house could be assessed as if it were in normal condition, despite thousands in diminished market value,” says Patrick O’Connor, president of O’Connor and Associates, one of the country’s largest tax consulting firms.

For example, in the Houston area, a call to the appropriate taxing authority by someone whose house was damaged by Hurricane Harvey won’t change this year’s tax bill because it is based on property values as of Jan. 1, 2017 -- before the big flood. But next year’s appraisals will be based on values as of Jan. 1, 2018, which means next year’s appraisals will reflect damage from Harvey.

Reporting the damage before the date of valuation will give owners a chance to ensure their property value is based on the impact of the disaster, says O’Connor, with the result being a lower value notice and a lower point to begin negotiations for a tax reduction.

Say the house was worth $500,000 before the flood, but is now worth $230,000 because of damage from the disaster. If the county appraiser knows that, he or she can reduce the valuation appropriately. But if he or she isn’t aware -- and most local tax officials don’t visit every house in their districts every year -- your tax bill will be based on the value before the flood, rather than after.

O’Connor says most people are unaware that they can cut their tax bills if their homes are damaged during a disaster such as the Northern California fires, or the hurricanes that blasted the Gulf Coast, much of Florida and all of Puerto Rico. But they can do so, if they are proactive.

Each of the country’s thousands of counties and cities has its own system for valuing property. When disaster strikes, some take the bull by the horns on assessing damage; others don’t have the resources, so they rely on self-reporting. Whether your taxing agency is on the ball or not, O’Connor says you should call just the same to make sure it is aware your place has lost value.

Incidently, some states, including Texas, require that when you put a previously flooded house on the market, you must tell would-be buyers of that fact.

To obtain the most relief, owners usually need to document the condition of their houses when they suffered damage and again at year’s end, when they should report what repairs have been made (if any) and what still needs to be done.

The downside to this, of course, is that there’s a good possibility that after you rebuild, you could end up with a higher assessed value. If you upgraded the place after a flood with new appliances, cabinets, flooring and so on, it is going to be worth more than before the disaster.

Also, whether you were insured or not when the tornado, hurricane or flood struck, you may be eligible for a federal income tax refund as a result of the damage. “Getting a refund is going to be the fastest way most people can get cash to rebuild,” O’Connor advises.

An IRS provision called Section 165 allows for a deduction as a result of casualty losses. That can include shipwrecks, plane crashes and train wrecks, as well as the more common disasters that cause a rapid change in value.

Generally, according to the IRS, you can deduct casualty and theft losses relating to your home, household items and vehicles on your federal income tax return if they are related to a federally declared disaster. But you can’t write off such losses if they are covered by insurance -- unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement.

If your property is personal-use property or isn’t completely destroyed, the amount of your casualty loss is the lesser of the adjusted basis of your property, or the decrease in fair market value.

“Casualty losses are generally deductible in the year the casualty occurred,” reads a page on the topic at IRS.gov. “However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to treat the casualty loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year.”

Back to that example above: The house was worth $500,000 but now is worth just $230,000. That gives the owner a $270,000 tax deduction that can be used on the 2017 federal tax return or on last year’s return.

If you elect to amend your 2016 return, says O’Connor, you can get a significant refund “in about a month.” Assuming the owner in this example is in the 25 percent tax bracket, the $270,000 deduction would generate a $65,000 refund, he says.

Another way to get cash quickly is a loan from the Small Business Administration (SBA). Normally, the SBA makes loans to businesses, but after a named disaster, it makes low-interest loans -- currently 1.75 percent amortized over 30 years -- to individuals as well.

O’Connor says, “it is not possible to find such attractive terms from traditional lenders.”

Loans to individuals are capped at $200,000 for rebuilding and $40,000 for personal property such as autos, clothing and tools. Unlike a tax refund, though, the SBA loan must be repaid.

More like The Housing Scene