HVAC Replacement from flooding

[Joe DeLuca]

Hi All,

So we got hit pretty hard from Hurricane Ida and need to replace two full HVAC systems in our Triplex. I understand that this doesn't qualify under the de minimus safe harbor exclusion. 

Is there any way to write off these systems in some way, or would it need to be applied to the basis? 

[Ashish Acharya]

Originally posted by @Joe DeLuca:

Hi All,

So we got hit pretty hard from Hurricane Ida and need to replace two full HVAC systems in our Triplex. I understand that this doesn't qualify under the de minimus safe harbor exclusion. 

Is there any way to write off these systems in some way, or would it need to be applied to the basis? 

Ask about the casualty loss with your CPA. 

A deduction for business casualty losses is allowed under IRC Sec. 165(c)(1). A casualty loss is defined as the damage, destruction, or loss of property resulting from a sudden, unexpected, or unusual identifiable event (e.g., car accidents, storms, floods). The amount of the loss is generally the lesser of the adjusted basis in the property or the decrease in the FMV due to the casualty.

Four important differences exist between business and personal casualty losses:

1. No percentage of AGI or $100 per casualty threshold applies to limit the amount deductible for business casualty losses.
2. For real property, a business casualty loss or involuntary conversion gain is calculated separately for each identifiable piece of property [Reg. 1.165-7(b)(2)]. For example, if casualty damages or destroys an office building and its landscaping, the properties are taken into account separately to determine the casualty loss or conversion gain attributable to each.
3. If business property is totally destroyed in a casualty and the fair market value of the property is less than its adjusted basis immediately before the casualty, the loss is calculated solely by considering the adjusted basis and the insurance proceeds. The decrease in FMV is not considered [Reg. 1.165-7(b)(1)(ii)].
4. For tax years beginning after December 31, 2017, and before January 1, 2026, the personal casualty and theft losses of an individual are deductible only to the extent they are attributable to a federally declared disaster [IRC Sec. 165(h)(5)]. If a taxpayer has personal casualty gains during the tax year, the taxpayer may deduct personal casualty losses not attributable to a federally declared disaster to the extent of the gains. No such limitation exists for business casualty losses.

The deductible amount of a casualty loss is determined after reduction for any insurance proceeds or other reimbursement a taxpayer receives or expects to receive on the casualty. If insurance proceeds exceed the casualty loss, taxable gain results unless those proceeds are used to acquire qualifying property under the involuntary conversion rule.