Posted on February 17, 2010.
Tax Reduction (losses can generate significant tax deduction) Tax Reduction (casualties can generate substantial tax reduction)
Tax reduction are the results of tax deductions. Tax deductions reduce taxable income but are not directly reduce federal income tax. For example, $ 100,000 of tax deductions reduces federal income taxes of $ 35,000 ($ 100,000 x 35%), assuming a tax rate of 35%. Most tax reduction require a cash expenditure (labor, equipment, supplies, utilities, etc.). A year expenditure of cash is not required for certain deductions of property taxes and can not be held for a loss of damage.
A loss of damage that may occur as a result of a flood, hurricane, tornado, landslide or other natural disasters. The intuitive thought pattern is: "My apartment complex of $ $ 5,000,000 suffered major damage totaling $ 1,500,000 for repairs and rent loss. Fortunately, I was completely covered for physical damage and rent loss, other than the franchise small. There is clearly no loss of damage that will generate tax cut, right? "
Most homeowners and investors believe the above statement to be true. Few investors claim the tax reduction in the loss of damage to federal income tax code allows them. Then we will examine the criteria for a tax deduction for losses and damages of the thought process regarding the acquisition of property that has suffered an accident.
Real estate owners suffer a loss of damage when the market value, immediately after the accident and insurance products is less than the market value immediately before the accident. The complex issue is how the value of the property immediately after the accident. Consider an office park in suburban 1 floors in Mississippi who had 3 feet of flooding caused by Hurricane Katrina. Suppose further that: 1) 8 foot sheet rock must be replaced throughout the facility to rebuild, 2) although the property was 90% occupied before the flood, occupancy is expected to be 5% during the reconstruction is product, 3) stabilized occupancy after renovation is not clear, because some companies can not return, 4) construction will take 12-18 months due to work pressures, and 5) the owner has casualty insurance reconstruction, but had no rental loss / business interruption insurance.
It is clear that the market value after the loss is less than the market value before the accident costs of construction less. Other factors to consider include: loss of rent, the market risk that is not enough tenants will be available after construction is completed, the cost of construction management, an illiquid market with few buyers just after accident, the construction risk, the risk of interest rate (rate may increase during the construction period negatively affect the value), the risk that operating expenses could increase during the construction period (perhaps insurance) and compensation for the effort of entrepreneurship to encourage a buyer to coordinate labor capital, management and support the risks mentioned above.
A careful analysis by an evaluator could show improvements have no value after the flood. In assessment missions conducted by the writer, accidental loss of 10-30% of market value before the accident took place (in a straight-forward, defensible analysis) is typical. This can cause a loss of significant harm tax deduction resulting from the tax reduction.
For example, a property whose market value of $ 5,000,000 for losses suffered a loss of 30%. While the victim is a serious detriment to the owners, the tax deduction of $ 1,500,000 ($ 5,000,000 X 30%) will reduce the financial loss. Based on a tax rate of 35%, the tax reduction is $ 525,000.
Congress provided a tax deduction of damages for loss encouraged.
