IRMA - Taxation Matters Briefing

USVIs including St. John were declared by FEMA a Major Disaster Declaration on September 7, 2017.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2017 return normally filed next year), or the return for the prior year (2016).

In general, non-business losses are subject to a 10% of AGI exemption.

As for rental real estate activities treated a passive activities with suspended losses, business gain or loss from a casualty of property used in a passive activity is fortunately not taken into account in determining the loss from a passive activity, meaning, fully deductible.

One must determine the tax cost basis in loans and capital upon which a loss is allowed, if any, and if necessary amend LLC operating agreements to provide that the loss allocations are made to those "at-risk" for the loss.

Depending upon insurance levels and undepreciated basis of the property lost, gains are possible. Loss deduction is limited to tax basis in loans and capital.  In this regard, might there be insufficient tax basis in capital and loans, it is necessary to determine if tax basis in loans and capital is reduced for suspended passive activity losses (PALs) not yet allowed.  Generally, from a tax view point it does not make much sense to allocate hurricane casualty losses to those without the tax basis to deduct those losses.  The tax deadline for amending a partnership's loss allocation formula, if needed, is before the tax return is filed and March 15, 2018.

For more basic back ground information, here is a link to the instructions to IRS Form 4684 where such losses are taken. We have an entire BNA Portfolio which delves into all the complexities and details including commentary anchored in code, regs and case law.

For losses of less then a total loss, there is an additional obstacle of the requirement to obtain supporting documentation of fair market valuation both before and after the disaster.  Not so easy when the property is located on St. John.  Maybe by signing up for FEMA assistance at the link above, one might obtain a damage survey of all properties for loss substantiation purposes.

Date: 14 September 2017