Financial and Tax Resources

Mortgage Observations:

Unfortunately, the mortgage agreement still stands in the event of a fire. Per realtor.com, “even with a total loss of the mortgaged property you still need to pay your monthly mortgage, and you must notify the lender of the loss as well. However, most lenders have programs to help homeowners through the process. Some lenders are willing to pause payments or temporarily suspend late payment penalties/foreclosures until the home is rebuilt.

Most standard mortgages require the borrower to repair the property (if feasible), unless otherwise agreed upon

Per the previously mentioned realtor.com article, “Insurance proceeds are generally held in escrow by the lender and disbursed according to a schedule as construction progresses.” Depending on the lender, some may also allow you to pay off the mortgage in full if possible or even refinance by doing a home-equity loan on the land. These should be explored on a case-by-case basis with each lender.

Generally, most lenders are understanding of these traumatic experiences, and are willing to help. Borrowers are encouraged to notify their lender and determine what their options are since they may vary.

Property Taxes:

You still owe property taxes on your property, even if you have suffered a total loss. But if the loss exceeds $10,000 in current market value, you may qualify for reassessment. You must apply online here: https://assessor.lacounty.gov/tax-relief/disaster-relief

• Some required forms have important deadlines:
  • • Property Tax Installment Deferral Application, ADS-820.2.pdf must be submitted within 12 months from the date the damage or when destruction occurred.
    • Property Tax Installment Deferral Application, ADS-820.3.pdf, must be received by the assessor no later than 5:00 p.m. on or before the delinquency date of the property tax bill installment due following the calamity.

Reconstruction Costs:

If you are going to rebuild, interview several contractors, insist on references, and contact every one of those references. The contractor you choose must of course be fully licensed and insured, but your contractor should have solid experience in building a home of your quality, size and value from the ground up.

The contractors you consider should give you a fully detailed written estimate of the construction costs and any “project management fees” they will impose on top of material and labor costs.

Additionally, you need to consider the costs of relandscaping your property, and that includes the potential costs of repairing any soil erosion which may have occurred. This is often overlooked in “regular” construction jobs, but fires can cause erosion issues and/or make the soil unstable. Get an assessment of this before accepting any contractor’s bid.

Even if the cost of rebuilding is more than the insurance benefit, you will need to have this fully detailed written construction estimate for any potential future litigation.

GoFundMe:

If you need to, start a GOFUNDME page now, or let friends start one if they offer. The process starts at https://www.gofundme.com/

Process Management:

We recommend opening a separate bank account for insurance proceeds. This will help you tack that money as you go through the process.

You might want to enlist a friend with good organizational skills to help sort everything. The process can be overwhelming, especially in light of the emotional issues involved, and soliciting a little help here can be very wise.

Financial Decision Making:

Assessing the damage you’ve suffered, the insurance coverage, the mortgage and property tax ramifications, the costs of temporary living arrangements and the tradeoffs between rebuilding vs moving are difficult. They may also exact an emotional toil. Do not get trapped into thinking that you have to make these decisions alone. Consider working with a 100% objective financial advisor to walk through all the options and decide which path is best for you and your family.

Income Tax Issues

Year-End Disaster Tax Relief Act Summary and Tax Tips for the 2024/2025 Natural Disasters

Planners can help clients cover the financial toll of rebuilding after a natural disaster

By: Randy Gardner, J.D., LL.M., CPA, RLP, CFP®, AEP – Distinguished, Julie Welch, CPA/PFS, CFP®, AEP – Distinguished, Creyton Vincent

January 2025

Randy Gardner, J.D., LL.M., CPA, RLP, CFP®, AEP (Distinguished), is the founder of Goals Gap Planning, LLC and the Gardner Foundation.

Julie Welch, CPA/PFS, CFP®, AEP (Distinguished), is the managing shareholder of Meara Welch Browne, P.C. (https://mwbpc.com), an accounting firm in the Kansas City area. Together, Julie and Randy authored 101 Tax Saving Ideas (Eleventh Edition).

Creyton Vincent is a firefighter in the U.S. Air Force and a financial educator with the Gardner Foundation.

Key Points:

1. Qualified Disaster relief payments are NOT taxable.
2. Losses above and beyond insurance/aid can be written off (reduced by a $500 floor)
   a. These are above the line deductions meaning that you don’t have to itemize
   b. You can apply this loss to your 2024 tax return so that clients can receive relief faster.
3. You can withdraw penalty free up to $22,000 from tax-deferred retirement accounts (NOT tax-free)
   a. Consider coordinating this with the year you write off any losses as these two could offset.
4. 2024 tax returns, payments, and quarterly estimated payments (Q4 2024, & Q1-Q3 2025) have all been postponed to 10/15/2025.

Natural disasters in 2024, and now the 2025 Los Angeles wildfires, were among the most deadly, widespread, and costly in U.S. history. It is likely you have clients who were affected.

On December 12, 2024, as part of the budget reconciliation bill, Congress passed and President Joe Biden signed the $100 billion Federal Disaster Tax Relief Act. Most of the funding will support the extended deduction for uncompensated disaster-related personal casualty losses, as previously allowed in the 2020 Taxpayer Certainty and Disaster Relief Act. The act also provides long-awaited relief for those affected by various disasters. Some of the provisions include an exclusion from gross income for: wildfire relief payments made to individuals in presidentially declared disaster areas; and relief payments to individuals for the February 2023 East Palestine, Ohio, train derailment. The additional relief is available for presidentially declared disasters occurring from 2021 through 60 days after enactment (February 9, 2025). On January 8, 2025, Biden declared the Los Angeles wildfires a qualifying disaster. Thus, relief payments and losses are eligible for beneficial treatment. Amended returns may be needed to take advantage of some provisions in the act.

Tax Treatment of Disaster Losses

Disaster losses may reduce the income taxes of the businesses and individuals affected. Businesses and investors may claim a tax-deductible disaster loss, reduced by any government benefits and insurance proceeds received, whether or not the storm, fire, or other disaster is a presidentially declared disaster.

For individuals who itemize, the tax treatment of personal casualty and disaster losses has varied over the years. When originally enacted, disaster and casualty losses, reduced by any available insurance benefits or other compensation received, were reduced by $500 per event. In 1984, the government added the requirement that the losses be reduced by 10 percent of adjusted gross income (AGI) floor. In 2009, the per event reduction was reduced to $100. From 2018 through 2025, under the Tax Cuts and Jobs Act, the rules changed again. An itemized deduction for casualty and disaster losses is allowed only if the loss occurred in a presidentially declared disaster area. The 2020 Taxpayer Certainty and Disaster Relief Act, which was extended by the Disaster Relief Act to apply to losses through February 9, 2025, allows an above-the-line deduction for losses from presidentially declared disasters once they exceed $500 per event. The 10 percent of AGI threshold does not apply.

An individual or business in a presidentially declared disaster area also has the option of deducting a disaster loss in the tax year immediately preceding the tax year of the loss. Those experiencing disasters in 2024 may amend their 2023 income tax returns to claim losses; those experiencing disasters in 2025 may claim losses on their 2024 income tax returns, rather than waiting to claim the loss on the 2025 return. Generally, such election must be made no later than six months after the original unextended due date for filing the tax return for the disaster year.
What is a presidentially declared disaster? The Robert T. Stafford Disaster Relief and Emergency Assistance Act, enacted in 1988, constitutes the statutory authority for most federal disaster response activities and established the Presidential Disaster Declaration Process. In order to receive federal benefits, the governor of the affected state must request a declaration by the president that a major disaster exists. The president can declare a major disaster for any natural event, including any hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought, or, regardless of cause, fire, flood, or explosion, that the president determines has caused damage of such severity that it is beyond the combined capabilities of state and local governments to respond.

Trends in Disaster Declarations

From 2011 through 2024, presidents declared 1,898 disasters. In 2024, Biden declared 182 disasters in 46 states. The only states with no declared disasters were Delaware, Indiana, Maryland, and Michigan. The states with the most disasters were Oregon (13), California (11), Florida (8), and Oklahoma (8).

The number of presidentially declared disasters is increasing. Perhaps this is because of climate change or that the presidential declaration is required for taxpayers to be able to claim a deduction. The three years with the most presidentially declared disasters are: 2020 (315 (COVID-19)), 2011 (242 (tornadoes in Joplin, Missouri, and the South)), and 2024 (182 (wildfires and Hurricanes Milton and Helene)). The following chart summarizes the disasters during the seven years before 2018, when presidentially declared disasters were not required for clients to receive a tax break, and the seven years from 2018 through 2024.

The main points are presidentially declared disasters are frequent across the country and they open the door to important tax breaks, including tax-free public and governmental assistance. Qualified disaster relief payments include amounts paid to an individual (other than insurance):

• To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster;
• To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster; or
• By a federal, state, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare.

Under the act, these payments are not subject to income tax, employment tax, or self-employment tax.

In addition to being able to receive this tax-free relief, affected taxpayers typically receive:

• An extension of time to file their tax returns of three to six months;
• An income tax deduction without having to itemize for the taxpayers’ uncompensated losses reduced by $500 per event;
• Permission to claim the loss on the tax return for the year prior to the year the disaster occurred in order to receive immediate financial assistance in the form of a tax refund;
• And the opportunity to avoid the 10 percent early distribution penalty on up to $22,000 of withdrawals from a tax-deferred retirement account.

Taxpayers should check to see if they live in a county that is part of a presidentially declared disaster area, making them eligible for any of these disaster-related tax benefits. Areas that have been identified for tax relief can be found on the www.irs.gov disaster relief page.

Example 1: 2024 Return

Pat and Sam, a married couple, earned $160,000 in 2024. As a result of hurricane damage, the couple paid $20,000 (after receiving $12,000 of government assistance) for storm damage to their business and $35,000 out of pocket (after receiving $45,000 from their homeowners’ insurance policy) for damage to their personal residence. The government assistance is not taxable. The couple’s adjusted gross income is $140,000 ($160,000 − $20,000 business disaster loss). If the couple claimed the standard deduction, their taxable income would be calculated as in Table 2.

Observations: First, the example illustrates the principle that disaster-related business and production-of-income losses ($20,000 in this example) are deductible even if the president did not declare the loss a qualified disaster. Second, for the personal loss to the residence, living in a presidentially declared disaster area makes a big difference in the couples’ tax calculation, saving them $5,790 ($14,482 − 8,692). Third, of the $35,000 disaster loss, $34,500 is deductible in addition to the standard deduction, even if Pat and Sam do not itemize since an above-the-line deduction is allowed for losses from presidentially declared disasters once they exceed $500 per event.

Example 2: Amended 2023 return

Pat and Sam should also check their prior year (2023) return to see if they should amend that return to get a refund sooner or in a larger amount. In the prior year, they had $200,000 of income because their earnings were not interrupted by a disaster.

Observations: By amending their prior year return to claim the disaster loss in 2023 rather than 2024, Pat and Sam can obtain a refund of $7,590 ($28,521 − $20,931), $1,740 more than the $5,790 Pat and Sam would save by claiming the disaster loss in 2024. The larger refund occurs because Pat and Sam were in the 22 percent tax rate bracket in 2023, rather than the 12 percent tax rate bracket they were in for 2024.

Insurance Proceeds and Involuntary Conversions

In some cases, taxpayers have a casualty gain (not a loss) from a disaster. This outcome occurs when insurance proceeds exceed the basis the taxpayers had in the destroyed property. The gain from a disaster can be deferred using the involuntary conversion rules.

The involuntary conversion rules apply to business and income-producing assets as long as they are replaced with a similar asset within two years after the close of the first tax year in which the taxpayer realizes any part of the gain. If the business real property is condemned or requisitioned by the government, the replacement period ends three years after the close of the first tax year in which any part of the gain is realized.

The involuntary conversion rules also apply to personal residences in presidentially declared disaster areas. The replacement period for qualifying residences is four years after the close of the first tax year in which any part of the gain is realized. The gain from the destruction of a personal residence could also be treated as a sale of a residence for purposes of the Section 121 exclusion rules ($250,000 for singles and $500,000 for married filing jointly couples).

In some cases, even longer replacement periods are granted for specific disasters. For example, in the Hurricane Katrina disaster area, taxpayers were granted a five-year replacement period.

Example 3: Involuntary Conversions

Robin, who is single, owns real estate with an adjusted basis of $400,000 on land that cost $100,000 ($500,000 total basis). The property was destroyed by a wildfire in 2025. Robin received insurance proceeds of $800,000 on February 1, 2025. Robin has $300,000 ($800,000 − $500,000) of realized gain.

Situation 1: If Robin buys replacement property on or before December 31, 2027, costing at least $800,000, none of the $300,000 realized gain will be recognized. The replacement property’s basis will be $500,000 (its $800,000 cost less the deferred gain of $300,000). If the replacement property cost had been $850,000, the basis would be $550,000 ($850,000 − $300,000). If Robin does not reinvest during the time period, the entire $300,000 gain will be recognized. If the property had been a qualifying personal residence, Robin could reduce the gain by $250,000 to a reportable gain of $50,000 ($300,000 − $250,000).

Situation 2: If Robin acquires the replacement property for $480,000, the excess of the insurance proceeds ($800,000) over the cost of the replacement property is $320,000 and the entire $300,000 realized gain is recognized. The replacement property’s basis is $480,000 because no gain was deferred. Again, if the property had been a qualifying personal residence, Robin could reduce the gain by $250,000 to a reportable gain of $50,000 ($300,000 − $250,000).

Situation 3: If Robin acquires replacement property for $530,000, the excess of the insurance proceeds over the cost of the new property is $270,000 ($800,000 − $530,000). Robin will recognize $270,000 ($800,000 − $530,000) of the $300,000 gain and the replacement property’s basis would be $500,000 ($530,000 cost of the replacement property − $30,000 deferred gain ($300,000 realized gain − $270,000 excess of the insurance proceeds over the cost of the replacement property)). If the property had been Robin’s primary home that she owned and lived in at least two of the previous five years, she could reduce the gain by $250,000 to a taxable gain of $20,000 ($270,000 − $250,000 exclusion).

In conclusion, disasters, such as the 2024 hurricanes and the 2025 wildfires, are increasing with regard to their cost and frequency. If our clients are affected by a disaster, keep these strategies in mind, especially if the event is in a presidentially declared disaster area.