Wildfires, Floods, Hurricanes: How the IRS Has You Back

Disasters like wildfires, floods, hurricanes, and earthquakes are making headlines more than ever. When severe damage occurs, the President may issue a federal disaster declaration — unlocking IRS tax relief to help victims recover financially.

Declared disaster victims may deduct uninsured losses on their tax returns, within certain limits. The IRS also automatically extends tax deadlines by 60 days, and often up to one year.

Taxpayers affected by federally declared disasters can withdraw up to $22,000 from their IRA, 401(k), or 403(b) without penalty. Taxes owed on the withdrawal can be paid over three years.

Government disaster relief payments — including mitigation funds — are generally tax-free. Charitable organization payments are also considered tax-free gifts.

Thanks to 2024 legislation, most wildfire-related payments from 2020 to 2025 are tax-free. Taxpayers who previously paid tax on these may file amended returns — even for 2020 and 2021 — until December 12, 2025.
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Casualty gains (when insurance exceeds property value) can be deferred if you reinvest the payout in repairs or replacements within two years — or four for a main home. Total home loss may also qualify for a gain exclusion of up to $250,000 ($500,000 for joint filers).

Questions? Contact us at helloagfintax.com.

Deducting your rental property tax losses against your other income is tricky, as you likely know. You have to get the tax law to treat you—say, a computer engineer—as a tax-code–defined real estate professional.
Let’s say you get there. Does that status allow immediate use of suspended passive losses? Unfortunately, the answer is no. Here’s why.
Understanding Passive Loss Rules
The tax code limits passive loss deductions to passive income, with any excess carried forward to future years. You release the carried-forward losses when you
have offsetting passive income from the same or other passive activities, or
completely dispose of the activity generating the loss.

Real Estate Professional Status
Qualifying as a real estate professional under IRS rules requires meeting two tests annually:
Spend more than 50 percent of your work time in real property trades or businesses.
Perform at least 750 hours of your work in real property trades or businesses.

Material Participation
Additionally, you must materially participate in the rental activity to create non-passive losses.

The Two-Part Solution 

Meeting (1) the real estate professional test and (2) the material participation standard allows current-year rental losses to offset non-passive income, such as wages or business income.
If you want to discuss about Real Estate Tax Planning, please get in touch with us at hfintax.comello@ag.

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