After the Flood: How to Deal with Taxes, Insurance, and Home Values After a Natural Disaster
The flood waters in Houston, Texas haven’t even started to abate after the disastrous storm that was Hurricane Harvey tore through the state here in August of 2017, and already victims are being left out in the cold. Several sources have reported that flood insurance policies plunged in the years leading up to the storm. In Houston alone, the number of policies fell from 133,000 to 119,000 between 2012 and 2017.
“When you start to see policies drop like this, FEMA should have done something about this,” said Robert Hunter, who ran the program in the late ’70s. He estimated that fewer than two of 10 homeowners with flood damage have flood insurance.
It’s an unfortunate fact of life of life that floods, tornadoes, fires, blizzards and other natural disasters cause havoc and mayhem in the lives of their victims. What many people don’t realize is that natural disasters have a lasting impact on the financial lives of their victims. Disaster-prone geographic areas are very often impacted by higher mortgage rates, higher insurance rates for damages, supplementary insurance costs for specific events like flooding, and increased property taxes. Other factors can also impact your bottom line, the most obvious being the need to clean, restore, and repair your home.
When it comes to dealing with taxes, insurance, and home values after a natural disaster, research is your friend. Let’s take a closer look at each issue to help you figure out what you can do to protect yourself in advance of a natural disaster, and how to respond if you find yourself in a financial pinch while trying to recover.
A Taxing Problem
Taxes in disaster-prone areas very often increase following a major event. You can help prepare yourself for such an eventuality by researching how city and state taxes have fluctuated in your geographic area over the past ten to twenty years.
The next issue to consider when it comes to taxes is how to manage your own tax returns in the year following a natural disaster. If your home or property was damaged by a natural disaster, there are many financial tactics that you can employ to lessen or diffuse the financial cost to you and your family.
First, if you have disaster costs or losses that are not fully paid by your insurance company, you can claim a “disaster loss deduction” for the year in which the loss occurred, or you can also deduct the loss in the following year by filing an amended tax return with the Internal Revenue Service (IRS).
Secondly, if your primary residence was damaged or destroyed and you received payments from your insurance company that were higher than the adjusted amount, you can postpone paying tax on some or all the gain if you buy a replacement property within the next four years. Consult your accountant or tax professional for more guidance on employing this tactic.
In order to determine some of these issues, you’ll need to learn to calculate your disaster loss. The easiest way to determine this amount is to take the lesser of the adjusted basis of the property—that’s the original purchase price of the property increased by the cost of additions or improvements and decreased by any earlier casualty losses—or the decrease in fair market value due to the disaster, and subtract any insurance or other reimbursement that you receive or expect to receive. Alternatively, you can determine the reduction in your property’s fair market value by hiring a professional to perform an appraisal on the property.
You will also want to pay attention to deadlines related to your income tax following a natural disaster. The IRS often postpones tax deadlines for taxpayers who are affected by a federally declared disaster. The IRS traditionally publishes these types of announcements about postponed tax deadlines online at www.irs.gov.
The final crucial item to consider regarding your taxes following a natural disaster is the help you may be able to access. First, additional tax relief may be available if your geographic area was declared a federal disaster area in the wake of a flood, fire or other natural disaster. A full list of federal declared disasters should be available on the Federal Emergency Management (FEMA) website.
Finally, you may wish to consult an accountant or other financial professional in terms of paying tax on any assistance you may have received. There are dozens of organizations and governmental bodies listed in the Catalog of Federal Disaster Assistance (CFDA) including disaster assistance, crisis counseling, disaster legal services, disaster unemployment programs, and the National Flood Insurance Program, as well as FEMA grants.
It’s important to note that some of these assistance programs are not considered to be income by the IRS. For example, federal disaster loans facilitated by the Small Business Administration (SBA) are not treated as income and will not affect your taxes. Similarly, funds from a charitable organization, your employer, or friends are considered “qualified disaster relief programs” by the IRS and are not counted as income, regardless of the source, as long as the money went to expenses not covered by insurance or other reimbursements. Conversely, if you receive qualified disaster relief payments that were meant to reimburse you for specific property losses, you should subtract the amount of those payments in calculating your losses.
The Thorny Problem of a Disaster-Prone Home Mortgage versus Home Value
When it comes to your mortgage rate, there are several factors that can affect your finances in the case of a natural disaster. If the cost of living (including managing natural disasters like hurricanes) tends to be high in your geographic area, mortgage rates will naturally be high as well. Lenders are understandably cautious about investing in these types of properties, but that also won’t stop them from taking advantage of the market. In the simplest terms, lenders who can take advantage of buyers expecting to pay more anyway will do so.
In advance of a major disaster, it’s important to at least consider the potential damage your home could face. For example, if your home is severely damaged in a flood, it could decrease the value of the home even after repairs are made. You could potentially be paying the same mortgage rate on your home, even though it is now worth less.
In addition, if the value of other property around your geographic area has dropped precipitously, it can make selling your home even more difficult. Simultaneously, you may have trouble purchasing a new home if lenders become aware that you’re having trouble selling your old home.
If you do find yourself shopping for a new home in a geographic area prone to natural disasters, take the time to do your research. Talk to a real estate professional about which kinds of neighborhoods see the most amount of damage from natural disasters. Find out whether your home is in a flood plain, and whether the wiring and other systems in the home are up to code. You can also speak with contractors who specialize in disaster recovery to see what the process might end up costing if disaster strikes.
Insuring Your Home Wisely
Dealing with insurance companies can be incredibly helpful experiences, or incredibly annoying ones, with every experience on the spectrum in-between. Knowing more about your coverage, risk, and benefits will be of superb help should a natural disaster strike your home.
First of all, it’s worth noting that the vast majority of home insurance does not cover flooding. Much like California insurance policies don’t often cover damage incurred during an earthquake, traditional insurance companies don’t cover damage from flooding. That’s why Congress, in 1968, enacted the National Flood Insurance Act, which enables homeowners to purchase flood insurance through the National Flood Insurance Program (NFIP), which can be an invaluable resource for individuals whose homes are prone to storms and other flood-producing conditions.
Following a natural disaster, there are several important steps to take to protect your financial interests. First, it’s important to document your loss—but only when authorities have determined it is safe to return to your home. Take photographs or videos of the damage to your property, as well as any repairs. You’ll also want to take steps to either protect or replace important documentation such as mortgage papers, licenses, birth certificates and other papers.
It’s also important to keep all receipts for disaster recovery, repairs, or other clean-up work. This documentation may help establish the level of decline in your home’s value due to the disaster, as well as providing evidence for any disputes with the insurance company or your home repair professionals.
You’ll naturally want to file a timely insurance claim. If your property is covered by general or disaster-specific insurance, you should file a timely claim for reimbursement of your losses due to a natural disaster.
Recovering from a Natural Disaster
Unfortunately, natural disasters continue to emerge, some worse than ever in human history, and they will continue to impact people’s lives. Natural disasters cause personal and financial harm and in some cases severe financial, economic, and psychological stress. By investing in some research, understanding the best practices for preparing for and dealing with a natural disaster, and documenting the facts and circumstances of your loss, you should be much better prepared to face the worst. First and foremost, stay safe and take smart steps to protect yourself and your family. After the storm or disaster event, take the time to secure your situation and hopefully before long, life will eventually return to normal.