Introduction and IRS Guidance
“I’ve already lost my property, will I lose tax credits, too?”
Part 1: Definition of casualty loss and where we find IRS guidance
Part 2: Casualty loss related to a presidentially declared major disaster
Part 3: Casualty losses that do not relate to a declared disaster
Part 4: IRS provisions designed to assist victims of major disasters
Definition of casualty loss. A casualty loss is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Property damage is not considered a casualty loss if the damage occurred during normal use, the owner willfully caused the damage or was willfully negligent, or if it was progressive deterioration such as damage caused by termites. Major storms, flooding and wildfires often result in casualty loss. Leaking pipes that eventually result in mold and property destruction and gradual deterioration of parking lots due to seasonal weather heaving are NOT examples of casualty loss.
Usually, a building will be subject to tax credit recapture if, as of the close of any tax year after the first year in the compliance period, the qualified basis of the building is less than it was as of the close of the prior tax year. Qualified basis is reduced when individual units or a building is (1) not housing tax credit-qualified residents, or (2) the residents are not paying program appropriate rent, or (3) the units are not habitable and not reasonably up to HUD’s Uniform Physical Conditions Standards (UPCS) or local code. The third item is where property damage events potentially affect tax credits. However, an exception to the general rule exists if the reduction in qualified basis results from a casualty loss, and the loss is replaced or reconstructed within a reasonable period, as determined by the IRS. As we will see, the exact length of this reasonable period must be below a maximum established by IRS guidance, and is further delegated to the state tax credit agency in the case of major disasters. The maximum period itself is also different for declared disasters and other casualty losses.
Question #1: Where do I find IRS guidance on casualty loss?