The recent devastating wildfires in southern California have been the most destructive in the State’s history, destroying tens of thousands of homes, as well as schools, shops, and other businesses. Many people are also grappling with the financial and tax implications of their losses. Taxpayers receiving insurance proceeds may be surprised to learn that a portion of those funds could be considered taxable gains. It’s crucial for each taxpayer to understand the potential tax implications of their post-disaster actions.

We strongly recommend that people affected by the recent wildfires should consult with a professional tax advisor who should assess how these general tax provisions apply to an individual’s specific circumstances.

The key tax matters are:

• Certain deferral provisions relating to return due dates and tax payment deadlines.
• Deductions for casualty losses sustained by taxpayers in the Federal declared disaster zone (or zones in the event additional counties are added to the Federal declared disaster area).
• Deferral of potential taxable gains that could arise from the receipt of insurance or other potential proceeds related to the damage claims.
• Gain exclusions for principal residences in the event of taxable gain recognition.
• Real property tax abatement during the reconstruction period.

This overview is intended to provide a brief summary of the tax provisions related to the Federal disaster declaration for Los Angeles County, as well as any additional counties that may later be included in the designated disaster zone. It aims to help taxpayers understand the various tax mitigation measures available under both Federal and California relief measures for affected areas.

Tax return and payment date deferral provisions

Following the disaster declaration issued by the Federal Emergency Management Agency (FEMA), individuals and households that reside or have a business in Los Angeles County, qualify for tax relief. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after January 7, 2025 and before October 15, 2025 are granted additional time to file.

As a result, affected individuals and businesses will have until October 15, 2025 to file returns and pay any taxes that were originally due during this period.

The October 15, 2025 deadline applies to individual income tax returns and payments normally due on April 15, 2025. This relief also applies to the 2024 estimated tax payment normally due on January 15, 2025 and estimated tax payments normally due on April 15, June 16, and September 15, 2025. Penalties on payroll and excise tax deposits due on or after January 7, 2025 and before January 22, 2025, will be abated as long as the tax deposits are made by January 22, 2025.

The October 15, 2025, deadline also applies to affected businesses:

• Quarterly payroll and excise tax returns normally due on January 31, April 30, and July 31, 2025.
• Calendar-year partnership and S corporation returns normally due on March 17, 2025.
• Calendar-year corporation and fiduciary returns and payments normally due on April 15, 2025.
• Calendar-year tax-exempt organization returns normally due on May 15, 2025.

Taxpayers who reside outside of the Federally declared disaster area but whose CPA firm is within the area may qualify for relief under these provisions.

California has enacted similar relief provisions.

Casualty loss deductions

Deductions for casualty losses sustained by taxpayers in the Federal declared disaster zone, or zones in the event additional counties are added to the Federal declared disaster area.

A casualty loss is a loss of property that occurs due to an identifiable event, such as a fire, storm, or similar disaster. If your home or other property was destroyed or damaged by the recent fires, you likely have incurred a casualty loss.

Currently, a personal casualty loss doesn’t result in a federal deduction. However, a casualty event related to a Federally declared disaster is an exception to the general rule. Accordingly, potential tax benefits for those affected under this exception, become available to impacted taxpayers, as outlined below.

Please note that California did not conform to the federal prohibition of personal casualty loss deductions. Therefore taxpayers residing outside of a Federally declared disaster zone may be entitled to California tax benefits.

Timing of Losses:

• A casualty loss can be claimed in the tax year the event occurs, or in the year preceding the disaster, if the taxpayer elects to claim the loss in that year.
• For taxpayers affected by the California wildfires, a Presidential Disaster Declaration may allow for expanded relief, including the ability to claim a loss deduction for the year prior to the disaster year (i.e., taxpayers can file amended returns to claim the loss for the preceding year). This provision provides an opportunity for clients to receive tax relief more quickly.  However, an eligible disaster loss is not deductible in the preceding year to the extent that, at the time the loss is claimed, the taxpayer has been reimbursed or has a reasonable prospect of reimbursement.
• A taxpayer must make the election to deduct a disaster loss in the previous year within six months after the due date (without extension) for filing the federal income tax return for the disaster year. If the election is not made, the disaster loss is deductible in the year in which the loss occurs.
• Information on where the damaged or destroyed property was located at the time of the disaster should generally be included on Form 4684.

Determination of the amount of Deductible Losses:

• For California purposes, casualty losses are generally deductible to the extent that they exceed $100 per casualty event and are greater than 10% of the taxpayer’s adjusted gross income (AGI).
• For federal tax purposes taxpayers affected by the California wildfires (Federally Declared Disaster), the 10% AGI floor doesn’t  apply, and if the loss exceeds $500, the taxpayer may deduct the casualty loss as an ‘above the line’ deduction. This means that even if they don’t itemize their deductions, they can still take the casualty loss in addition to the standard deduction.
• If the property was destroyed or significantly damaged, the loss is the difference as described below and offset by the amount of any insurance reimbursement or other compensation received.

Amount deductible

(1) General rule‍

In the case of any casualty loss whether or not incurred in a trade or business or in any transaction entered into for profit, the amount of loss to be taken into account for purposes shall be the lesser of either—

• (i) The amount which is equal to the fair market value of the property immediately before the casualty reduced by the fair market value of the property immediately after the casualty; or
• (ii) The amount of the adjusted basis determining the loss from the sale or other disposition of the property involved. However, if the property used in a trade or business or held for the production of income is totally destroyed by casualty, and if the fair market value of such property immediately before the casualty is less than the adjusted basis of such property, the amount of the adjusted basis of such property shall be treated as the amount of the loss.

Example: The house is used as his private residence. Since the property is used for personal purposes, no allocation of the purchase price is necessary for the land and house. Likewise, no individual determination of the fair market values of the land, house, trees, and shrubs is necessary. The amount of the casualty loss deduction allowable with respect to the land, house, trees, and shrubs for the taxable year 1961 is $14,600, computed as follows:
‍

‍(2)Method of valuation

• (i) In determining the amount of loss deductible under this section, the fair market value of the property immediately before and immediately after the casualty shall generally be ascertained by competent appraisal. This appraisal must recognize the effects of any general market decline affecting undamaged as well as damaged property which may occur simultaneously with the casualty, in order that any deduction under this section shall be limited to the actual loss resulting from damage to the property.
• (ii) The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that ( a) the repairs are necessary to restore the property to its condition immediately before the casualty, ( b) the amount spent for such repairs is not excessive, ( c) the repairs do not care for more than the damage suffered, and ( d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty.

Deferral of potential taxable gains that could arise from the receipt of insurance or other reimbursement proceeds related to the damage claims.

Section 1033 Deferral Option:

• Taxpayers can elect to defer recognition of gain on the involuntary conversion of property due to a casualty event (such as wildfire destruction), provided they reinvest, for instance insurance proceeds, in similar property within a specified time frame (usually 2 years after the end of the year in which the loss occurred).  However, the replacement period is extended to 4 years in the instance that the property is located within a Federally declared disaster zone.  This reinvestment typically occurs when a taxpayer uses all the insurance proceeds related directly to the property damage to rebuild their home including surrounding structures and landscaping.
• This deferral allows taxpayers to postpone taxes on any gain resulting from insurance settlements, grants, or other compensations until the new property is disposed of.

Reporting Requirements:

• Taxpayers who elect Section 1033 treatment must report the deferral on Form 4684, “Casualties and Thefts,” and may need to provide additional details regarding the involuntary conversion of the property.
• It is crucial to document the destruction, and any insurance or other reimbursements received in order to properly calculate the loss and report it to the IRS.

Gain exclusions for principal residences in the event taxable gain recognition.

• Insurance Reimbursement and Gain Recognition: IRC Sections 1033 and 121
• If insurance or other reimbursements exceed the taxpayer’s adjusted basis in the property, the taxpayer may recognize a gain unless the gain is deferred under Section 1033.
• Clients and their tax advisors should assess their insurance settlements carefully to determine whether they may be required to recognize a gain and how they can mitigate tax implications.
• One such determination is the potential exclusion of a portion of the gain under the provisions of IRC Section 121. Which provides that the exclusion of gain from sale of principal residence may apply to the gain that is otherwise recognized under the provisions of Section 1033 in the event the principal residence is located within the Federally declared disaster zone.
• Therefore, it is important that an affected taxpayer discusses this potential exclusion in the event they are advised that they may realize potential gain.

Real property tax abatement during, and postponement of, the reconstruction period.

Taxpayers whose homes are damaged or destroyed in an amount greater than $10,000 may file an “Application for Reassessment of Property Damaged or Destroyed by Misfortune of Calamity”, form ADS-820 with the County of Assessor’s office. This must be done within 12 months of the date the property was damaged or destroyed. The advantage to property owners is that the County will reassess the property value and issue temporary tax relief during the rebuilding period. Note that upon completion of the rebuilding the original Proposition 13 value with the annual CPI adjustments will be restored as long as the property as rebuilt is substantially the equivalent of the properties assessed value prior to the damage or destruction. This matter should be examined in more detail when making decisions about restoring the property.

Additionally, on the 16th January, 2025, Governor Gavin Newsom issued an executive order allowing taxpayers in certain ZIP codes within LA County to postpone property tax payments and business personal property tax statement filings until April 10, 2026 without being subject to penalties and interest.Those ZIP codes include:

90019, 90265, 91001,91107, 90041, 90272, 91040, 93535, 90049, 90290, 91104, 93536, 90066, 90402,91106.

Concluding comments:

Our intention in providing this information is to enable people impacted by the recent fires to have general information on hand when they discuss these matters with their tax advisors and other professionals.  We encourage users of this information to reach out to their individual professional advisors, including their insurance agents and tax advisors, to  relate this general guidance to their individual facts and circumstances.  

For our existing clients and those people who wish to engage us in this process please know that we are available to assist you in these matters.

For more information or assistance in addressing client-specific cases, please feel free to reach out.

See our California Wildfires Tax Guide for a condensed version of this information.