Casualty Loss

Casualty Loss Can Generate Massive Taxcongress and take the tax deduction. Click here
DeductionsA casualty loss may occur as a resultfor a FREE preliminary analysis of income tax
of a flood, hurricane, tornado, mudslide or othersavings for your property. Cost segregation
natural disaster. The intuitive thought pattern is:produces tax deductions and reduces federal
"My apartment complex worth $5,000,000income taxes across the country and in every
suffered major damage totaling $1,500,000 forsize market. Below are just a few examples of
repairs and rent loss. Fortunately, I wascities where cost segregation generates
completely covered for both physical damage andmeaningful tax deductions. City:
rent loss, other than a small deductible. There is- Memphis, TN
clearly no casualty loss I can claim as a tax- San Francisco, CA
deduction, right?"- New Orleans, LA
Tax deductions are the basis for tax reduction.- New York, NY
Tax deductions reduce taxable income but do not- Hartford, CT
directly reduce federal income taxes. For- Las Vegas, NV
example, $100,000 of tax deductions reduces- Los Angeles, CA
federal income taxes by $35,000 ($100,000 X- Atlanta, GA
35%), assuming a 35% tax rate. Most tax- Orlando, FL
deductions require a cash expenditure (labor,- Miami, FL
material, supplies, utilities, etc). A current period- Louisville, KY
cash expenditure is not required for some real- Salt Lake City, UT
estate tax deductions and may not be required- Boise, ID
for a casualty loss. Most real estate owners and- Lakeland, FL
investors do not consider casualty losses as a- Wichita, KS
source of tax deductions. Few investors- McAllen, TX
claim the casualty loss tax deduction the federal- Columbus, OH
income tax code allows them. Let's review the- Ft. Lauderdale, FL
criteria for a casualty loss tax deduction and the- San Antonio, TX
thought process regarding acquisition of a- Durham, NC
property that has suffered a casualty. Real estate- Allentown, PA
owners suffer a casualty loss when the market- Youngstown, OH
value immediately after the casualty plus- Little Rock, AR
insurance proceeds is less than the market value- Greensboro, NC
immediately before the casualty. The complex- Greenville, SC
issue is how to value the property immediately- Kansas City, MO
after the casualty. Let's consider a 1-story- Raleigh, NC
suburban office park in Mississippi which suffered- San Jose, CA
3-feet of flooding due to Hurricane Katrina. Let's- Palm Bay, FL
further assume: 1) 8 feet of sheet rock must be- Honolulu, HI Cost segregation produces tax
replaced in the entire property to rebuild, 2)deductions for virtually all property types, including
although the property was 90% occupied beforethe following: Property Type:
the flood, occupancy is expected to only be 5%- Regional mall
while rebuilding occurs, 3) stabilized occupancy- Service station
after renovation is not clear since some- Drugstore
businesses may not return, 4) construction will- Night club
take 12-18 months due to the labor constraints- Supermarket
and 5) the owner has casualty insurance to rebuild- Racket club
but did not have rent loss/business interruption- Auto service garage
insurance. It is clear the market value after the- Airplane hangar
casualty is less than the market value before the- Nursing home
casualty less construction costs. Other factors to- Subsidized housing Almost every industry,
consider are: rent loss, market risk that notincluding the following, can generate cost-efficient
enough tenants will be available after constructiontax deductions by using cost segregation.
is completed, cost of construction management, aIndustry:
illiquid market with few buyers just after the- Nondurable good wholesalers
casualty, construction risk, interest rate risk (rates- Durable good wholesalers
could rise during the construction period negatively- Day care facilities
affecting value), risk that operating expenses- Computer and electronic manufacturing
could increase during the construction period- Health care facilities
(perhaps insurance) and compensation for- Chemical manufacturing
entrepreneurial effort to induce a buyer to- Printing activities
coordinate labor capital, management and- Warehousing and storage
compensation for capital during the reconstruction- Electronic and appliance stores
and releasing process. A careful analysis by an- Apparel manufacturing
appraiser might show the improvements have noO'Connor & Associates is a national provider of
value after the flood. In appraisal assignmentscommercial property real estate consulting
performed by the writer, a casualty loss ofservices including cost segregation studies, due
10-30% of the market value before the casualtydiligence, income tax, abandonment studies,
has occurred (in a straight-forward, defensiblebusiness personal property valuations, commercial
analysis) is typical. This can generate a meaningfulappraisals, feasibility studies , highest and best use
casualty loss (and tax deduction). For example, aanalyses, and lease audits.
property with a market value of $5,000,000Our services benefit owners of all commercial
suffers a 30% casualty loss. While the casualty isproperty types including multi-family housing, retail
a serious hardship for the owners, the $1,500,000stores, hospitals, hotels, industrial properties,
($5,000,000 X 30%) tax deduction will mitigatemanufacturing facilities, medical offices,
the financial loss. Congress provided a casualtycommercial offices, restaurants, self-storage units,
loss tax deduction to encourage investment in realshopping malls, shopping plazas and warehouse
estate. If you have the misfortune to suffer adistribution centers.
casualty loss, take the helping hand offered by