The firestorm that hit the North Bay in October had huge consequences for many homeowners and businesses, including tax implications.
We interviewed Aaron Tompkins, a CPA and senior manager in the tax section of Moss Adams in Santa Rosa, about how to handle fire-related casualty losses using Form 4684. The Moss Adams building, the topmost structure of Fountaingrove Center on Round Barn Blvd., did not burn, but fire scorched trees and landscaping next to it. Moss Adams was unable to use the space for more than three weeks.
Your building has been cleaned of smoke damage after the fire?
Yes. About every 30 seconds we hear trucks rumbling down full of debris. It’s nonstop. I’m surprised how quickly they have worked. I expected it to take longer. The magnitude — there is so much to be done.
Fire victims have casualty losses. How should business and property owners handle those losses on Form 4684?
It’s not a super-difficult form. If a business has equipment, a car, a building, the first step is to figure out if you have a casualty gain or loss.
A gain would be if insurance covered more than the basis in the property?
Exactly. To make that calculation, basis (amount paid for property) is important. If the insurance reimbursement is more than the basis, it’s a gain and you’re done. If insurance proceeds are less than the basis and the property was not fully destroyed, then you have to figure fair-market value before and after the fire. The deduction is the lesser of the drop (in value between current value after fire and either basis or market value before fire, minus insurance payout). You can never deduct more than your basis.
Your clients have received insurance?
Insurance has been very responsive. People are already getting insurance reimbursements. Claims are being paid.
Has anyone come to you and asked about tax repercussions?
Yes. We have a number of clients who were affected, more homeowners than businesses. On the business side, it’s primarily clients with rental property in Fountaingrove or Coffey Park. We have quite a few. Most had sufficient insurance. They’re going to be on the casualty-gain side. They have to figure out if they’re going to keep the cash and pay tax, or reinvest.
Roll it over?
Exactly. The tax code has rules that apply to casualty gains that will get you out of that tax for now. You can roll it into replacement property. On the business side, rules are very favorable. You don’t have to roll it into something exactly the same.
Just roughly comparable?
Yes. In a federally declared disaster area, which this is, you have to reinvest in other business property under Section 1033. Normal rules that would apply to a 1031 exchange are relaxed in a federally declared disaster area. You have business property that was destroyed, insurance reimbursement comes in. If there’s a gain, you can invest in totally different business property.
How far does that latitude go? At what point would the IRS object to the replacement property?
I don’t have anybody pushing that envelope as long as they’re reinvesting in the business.
Declaration of a federal disaster area allows a fire victim to file a claim retroactively with revision of 2016 taxes?
Exactly. Once we figure out we have a loss, we can take that loss on upcoming 2017 tax returns or, because we’re in a federally declared disaster area, go back and amend 2016 returns. We get to pick.
More business coverage of the North Bay wildfires and recovery: nbbj.news/2017fires