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When it happens, as the recent earthquake and hurricane headlines remind us, it can be sudden and brutal: A property you own is destroyed by an act of nature or in an accident. And then, to make a bad situation even worse, you quickly learn that some or all of your loss is not covered by insurance. There can be some consolation: You might be able to write off a portion of your personal losses as a tax deduction.

The law and the Internal Revenue Service are not terribly generous, however. For starters, you may not deduct the first $100 of any personal loss. (Casualty losses on business property are entitled to a 100 percent deduction.)

Far more significant, you may write off only those personal casualty losses that add up to more than 10 percent of your adjusted gross income. Say your AGI is $50,000 in 1989. Your losses (after subtracting the first $100 and any insurance reimbursements) must top $5,000 before you can write off one cent.

Also, if you don't itemize your deductions, you may not write off casualty losses. Assuming you do qualify, you may deduct casualty losses in the year they occur -- unless your region or community is declared a federal disaster area by the president, which has happened 276 times since 1979, including the designation of the San Francisco area after the October earthquake. In that case, you may take the write-off either in the year of the disaster or in the previous year by filing an amended return.

The advantage of claiming the loss retroactively, says Janice M. Johnson, a partner in the New York City office of BDO Seidman, is that you collect cash quickly in the form of a tax refund to help finance repairs and rebuilding.

There is still another ceiling on your deductions. They are limited to the lesser of either the original cost of the property or the amount by which the damage has reduced its fair market value.

Let's assume that you purchased a house in San Francisco 20 years ago for $100,000. Its fair market value the day before the quake was $1 million. Since quake insurance is so expensive, you did what some 75 percent of Bay Area residents do: You insured your property for every casualty but earthquakes. Alas, your home was almost completely destroyed. Still, unless you replace it, your deduction will be limited to $100,000 -- that is, the lesser of your original cost ($100,000) or the current fair market value ($1 million).

There is a way to avoid such a beating and gain a generous deduction, however. You can restore your house. Then you may collect a deduction equal to the amount you spend -- up to the fair market value.

"The IRS won't remember two years from now that your stream flooded," says Ms. Johnson. So she suggests that you hold on to any news clippings of the event, as well as your own photos of the damage and reports from insurance adjusters.

Also, you must verify the amount of your loss. The family china that was destroyed when Hurricane Hugo swept through your area may have been worth a small fortune, but unless you can prove it, you'll have a hard time writing off its full value.

Therefore, before disaster strikes, have your valuables appraised. You may also substantiate your losses with receipts for major purchases. Photographs or videotapes taken before a casualty will also help.

Money Magazine

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