Tax Savings From the Texas Winter Freeze?

Tax Savings From the Texas Winter Freeze?

Authored by Haynie & Company Partner Bernard Abercrombie, CPA

With the onset of this February’s freezing weather, it is a reminder of last year’s Texas winter freeze almost exactly one year later. Most people are starting to get their tax return documents in the mail and pulling together their info to give to their tax return preparer. Since the February 2021 freeze resulted in so much damage, we thought it would be a good time to remind everyone of the tax opportunity that may exist for your 2021 tax return.

Many in Texas suffered damage because of that 2021 freeze, all the way from sprinkler and vegetation damage up to burst pipes requiring major renovations. Much of the damage may not have been fully covered by insurance.

The winter storm resulted in Texas being designated as a federally declared natural disaster area.  The significance of this is extremely important for tax purposes. It opens the door for claiming a casualty loss for damages in excess of $500 being claimed as a loss on your 1040. A relatively unusual quirk in the law allows for claiming that loss on either your 2020 or your 2021 tax return.  A previously filed 2020 tax return could be amended to claim the loss for 2020 if that turns out to be more advantageous. If someone had unreimbursed damages, an analysis should be done to determine if there is a significant enough tax benefit for claiming the loss on an amended 2020 tax return vs. including it in this year’s 2021 return.

Without spending a lot of time on technical details, the loss is allowed to the extent of the decrease in the fair market value of the property from before the freeze compared to after the freeze, reduced by any insurance proceeds and then reduced by the statutory reduction of $500. We have had success in claiming the loss as the cost of putting the property back in its’ previous condition.

As a simple example related to the winter freeze, if the freeze resulted in broken sprinkler pipes and loss of plants and trees and it cost $2,800 to repair and replace those without any insurance reimbursement. The loss allowed would be $2,800 less the $500 disallowed by law, or $2,300. Once again, this loss can be claimed on either your 2020 or 2021 tax return.

Note that expenditures that result in an “improvement” to the property must be capitalized and are not allowed as part of the casualty loss. An example would be if you had carpeting as flooring before the casualty and replaced it with hard wood floors, that would be an improvement and some or all of that would not be included in the casualty loss calculation.

As always, please consult us to discuss the specific details of your situation.

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