The IRS has provided two general purpose safe harbors for claiming a casualty loss related to a personal residence and its contents (in Revenue Procedure 2018-8), as well as one tailored for the hurricanes that took place in 2017(Revenue Procedure 2018-9).

The general purpose ruling provided for safe harbor methods for claiming an amount of casualty loss using a simpler method than getting “before event” and “after event” appraisals. One set of the general purpose relief provisions apply to any losses, while the second set only apply if the loss arises from a federally declared disaster.

Note: The Tax Cuts and Jobs Act generally bars a deduction for personal casualty losses in 2018 except for those incurred in a federally declared disaster area. Thus, effective for 2018 losses, both general purpose safe harbors will only be available if the loss arises from a federally declared disaster.

The ruling only applies to personal-use residential property. Specifically, the ruling limits the applicability to property noted below:

For purposes of this revenue procedure, personal-use residential real property is real property, including improvements (such as buildings and ornamental trees and shrubbery), that is owned by the individual who suffered a casualty loss and that contains at least one personal residence. Personal-use residential real property does not include a personal residence if any part of the personal residence is used as rental property or contains a home office used in a trade or business or transaction entered into for profit. For purposes of this revenue procedure, a personal residence is a single family residence, or a single unit within a contiguous group of attached residential units (for example, a townhouse or duplex), owned by the individual who suffered a casualty loss, and includes any structures attached to the residence or single unit. For purposes of this revenue procedure, a personal residence does not include a condominium or cooperative unit, or any other property for which the individual who suffered the casualty loss does not own the structural components of the building (such as the foundation, walls, and roof), or owns only a fractional interest in all of the structural components of the building, or a mobile home or trailer.

Personal belongings covered by this ruling are described below:

For purposes of this revenue procedure, a personal belonging is an item of tangible personal property that is owned by the individual who suffered a casualty or theft loss and that is not used in a trade or business or in a transaction entered into for profit. For purposes of this revenue procedure, personal belongings do not include a boat, aircraft, mobile home, trailer, or vehicle (as defined in section 5.02(2) of this revenue procedure), or an antique or other asset that maintains or increases its value over time.

The safe harbors that apply to all deductible casualty losses regardless of whether they occur in a federally declared disaster area are the “estimated repair cost safe harbor,” the “de minimis safe harbor” and the “insurance safe harbor method.”

The ruling describes the estimated repair cost safe harbor as follows:

Under the Estimated Repair Cost Safe Harbor Method, to determine the decrease in the fair market value of the individual's personal-use residential real property, an individual may use the lesser of two repair estimates prepared by two separate and independent contractors, licensed or registered in accordance with State or local regulations. The two repair estimates must set forth the itemized costs to restore the individual's personal-use residential real property to the condition existing immediately prior to the casualty. However, the costs of any improvements or additions that increase the value of the personal-use residential real property above its pre-casualty value, such as the cost to elevate the personal residence to meet new construction requirements, must be excluded from the estimate for purposes of this safe harbor. The Estimated Repair Cost Safe Harbor Method is available for casualty losses of $20,000 or less, prior to application of the limitations under § 165(h).

The de minimis safe harbor is described below:

Under the De Minimis Safe Harbor Method, to determine the decrease in the fair market value of the individual's personal-use residential real property, an individual may estimate the cost of repairs required to restore the individual's personal-use residential real property to the condition existing immediately prior to the casualty. However, the costs of any improvements or additions that increase the value of the personal-use residential real property above its pre-casualty value, such as the cost to elevate the personal residence to meet new construction requirements, must be excluded from the estimate for purposes of this safe harbor. An individual's estimate must be a good-faith estimate, and the individual must maintain records detailing the methodology used for estimating the loss. The De Minimis Safe Harbor Method is available for casualty losses of $5,000 or less, prior to application of the limitations under § 165(h).

Finally, the ruling describes the insurance safe harbor method:

Under the Insurance Safe Harbor Method, to determine the decrease in the fair market value of the individual's personal-use residential real property, an individual may use the estimated loss determined in reports prepared by the individual's homeowners' or flood insurance company setting forth the estimated loss the individual sustained as a result of the damage to or destruction of the individual's personal-use residential real property.

If the casualty to the personal use residential property occurs in a federally declared disaster area, additional safe harbor methods are available. These methods are the “contractor safe harbor method” and the “disaster loan appraisal safe harbor method.”

The contractor safe harbor method is described as follows:

Under the Contractor Safe Harbor Method, to determine the decrease in the fair market value of the individual's personal-use residential real property, an individual may use the contract price for the repairs specified in a contract prepared by an independent contractor, licensed or registered in accordance with State or local regulations, setting forth the itemized costs to restore the individual's personal-use residential real property to the condition existing immediately prior to the Federally declared disaster. However, the costs of any improvements or additions that increase the value of the personal-use residential real property above its pre-disaster value, such as the cost to elevate the personal residence to meet new construction requirements, must be excluded from the contract price for purposes of this safe harbor. To use the Contractor Safe Harbor Method, the contract must be a binding contract signed by the individual and the contractor.

The alternative disaster loan appraisal safe harbor is detailed below:

Under the Disaster Loan Appraisal Safe Harbor Method, to determine the decrease in fair market value of the individual's personal-use residential real property, an individual may use an appraisal prepared for the purpose of obtaining a loan of Federal funds or a loan guarantee from the Federal Government setting forth the estimated loss the individual sustained as a result of the damage to or destruction of the individual's personal-use residential real property from a Federally declared disaster.

A different set of safe harbor methods are available for personal belongings. For all deductible losses for personal belongings in a personal use residence a “de minimis safe harbor” as described below is available.

Under the De Minimis Safe Harbor Method, an individual may make a good faith estimate of the decrease in the fair market value of the individual's personal belongings. An individual using the De Minimis Safe Harbor Method must maintain records describing the personal belongings affected and detailing the methodology used for estimating the loss. The De Minimis Safe Harbor Method is available for casualty or theft losses of $5,000 or less, prior to application of the limitations under § 165(h).

A special safe harbor is in place if the casualty takes place in a federally declared disaster area. The “replacement cost safe harbor” is detailed in the revenue procedure as follows:

Except as provided in section 5.02(2) of this revenue procedure, an individual may use the safe harbor method in this section 5.02(1) to determine the fair market value of the individual's personal belongings located in a disaster area immediately before a Federally declared disaster in order to compute the amount of a casualty or theft loss. If an individual chooses to use the Replacement Cost Safe Harbor Method for a Federally declared disaster, the individual must apply that method to all personal belongings for which a loss is claimed under § 165 for that Federally declared disaster, except those specifically excluded in section 5.02(2) of this revenue procedure.

To use this safe harbor method, an individual must first determine the current cost to replace the personal belonging with a new one and reduce that amount by 10% for each year the individual owned the personal belonging using the percentages in the Personal Belongings Valuation Table below. If the personal belonging was owned by the individual for nine or more years, the pre-disaster fair market value is 10% of the current replacement cost under this safe harbor method.

Personal Belongings Valuation Table

Year	Percentage of Replacement Cost to Use
1	90%
2	80%
3	70%
4	60%
5	50%
6	40%
7	30%
8	20%
9	10%

To determine the amount of a casualty or theft loss for personal belongings that were damaged, destroyed, or stolen:

(a) Determine the decrease in the fair market value of each personal belonging by subtracting the fair market value of the personal belonging immediately after the Federally declared disaster from the fair market value of the personal belonging immediately before the Federally declared disaster, determined as described above. If a personal belonging was destroyed or stolen as a result of a Federally declared disaster, its fair market value after the disaster is zero.

(b) Determine the basis of each personal belonging (generally its cost).

(c) Compare the decrease in fair market value (from step (a)) with the basis of the personal belonging (from step (b)). From the lesser of the basis or decrease in fair market value, subtract any insurance or other reimbursements the individual receives or expects to receive for the personal belonging.

There are restrictions to using the replacement cost safe harbor as outlined in the revenue procedure.

An individual may not use the Replacement Cost Safe Harbor Method for Federally declared disasters for a boat, aircraft, mobile home, trailer, vehicle, or an antique or other asset that maintains or increases its value over time. For purposes of this revenue procedure, a vehicle is an automobile, motorcycle, motor home, recreational vehicle, sport utility vehicle, off-road vehicle, van, or truck.

An individual may determine the pre-disaster value of a boat, aircraft, mobile home, trailer, or vehicle by consulting established pricing sources. See Rev. Rul. 2002-67, 2002-2 C.B. 873; Publication 561, Determining the Value of Donated Property.

In all cases any deduction must be reduced for “no cost repairs” which are defined as “repairs made for a de minimis or token cost, donation, or gratuity.” An example would be repairs performed for the taxpayer by volunteers.

For those taxpayers with casualty losses that arose from Hurricanes Harvey, Irma and/or Maria, the IRS published a table of damage per square foot for each area for various types of damage in Revenue Procedure 2018-9. The categories of loss types with their own tables are:

Total Loss
Near total loss
Interior flooding over 1 foot
Structural damage from wind, rain, debris
Roof covering damage from wind, rain or debris
Damage to detached structure
Damage to decking

A taxpayer that qualifies for these safe harbors will look up the appropriate table for the damage type incurred, and apply the rate for his/her geographic area and/or overall size of the structure.