When an unexpected wildfire blazes through a property, it generally leaves behind the charred ashes of grass, trees, fences and possibly buildings. Landowners will immediately think of the loss in value the wildfire has created. In the eyes of the Internal Revenue Service, is there a deductible loss?

For purposes of this article, we are only going to discuss the deductibility of a loss of for-profit business property. There are other rules and guidelines for personal and non-business property.

A casualty loss is allowed when the damage is of a physical nature resulting from an accident, fire, storm, shipwreck, flood or other sudden destructive force. Damage from a wildfire definitely qualifies as a sudden destructive force. However, the first thing to remember when determining if there is a deductible loss is a basis or unrecovered cost must exist for the item. In the case of grass, it is unlikely it has a basis. If it was weed sprayed or fertilized, these expenses would have been deducted as ordinary business expenses – therefore, no basis left in the grass and no deductible loss. A unique situation may be where land was purchased recently and the purchase price was allocated between the land and the grass. For example, the transaction price was $800 per acre — $750 was allocated to land and $50 to grass. In this situation, the grass would have a basis of $50 per acre, allowing this amount to be deducted as a casualty loss. This will be a rare situation. In the case of timber and fruit or nut orchards that have a basis or unrecovered cost, it is likely that in the case of fire damage, there will be a deductible loss. Also, in the case of fences, corrals and barns, it is likely they will have a basis and therefore a deductible loss if the item(s) have not been fully depreciated. The amount of a loss is determined by the difference in the value of the property immediately before and immediately after the casualty but cannot be in excess of the basis of the property. The amount should be supported by an appraisal made by a qualified appraiser. The appraisal fees are deductible. The casualty loss must be reduced by insurance or other compensation received.

If a landowner is required to file his or her income tax return as a farmer, meaning two-thirds of their gross income is from farming, the return is due March 1 (or April 15, if an estimate was filed by Jan. 15 and the estimated tax paid). Therefore, time is short unless an extension of time is filed. Contact your tax preparer soon to receive advice specific to your individual situation.

Dan Childs
Agricultural Economist