Saturday, January 31, 2015

Deducting Mexican Hurricane Losses on Your US and Mexican Tax Returns


By Don D. Nelson, US Attorney & CPA  and  Santiago Solorzano, Mexican International Tax Attorney

If you have had to spend a lot  of money after Odile to repair and fix up your personal or business real estate and other property in Baja Sur,  there are both US and Mexican tax benefits that might partially relieve the   pain with tax savings and other benefits.  A brief summary of those rules are provided here:

US Income Tax Deductions May Be Available:

If you are a US Citizen, on your 2014 tax return you may be able to get a deduction for the costs of repairs and replacements of the damages you incurred arising from  Odile. These are available if the damage was to your vacation home, permanent residence, rental, or business. The rules are different for personal use property versus business use property

Personal Losses on real estate, furniture, and other property on your US return

Using form 4864 attached to your 2014 form 1040 you can deducted the lesser of the reduction in fair market value to you hurricane ravaged property or its adjusted basis (cost minus any depreciation).  The reduction in fair market value is best determined by a professional  appraisal of the property’s value before and after the hurricane.  The IRS will  often, though not always, allow the reduction in fair market value to be determined by the cost of repairs and replacements to bring your property up to the same condition it was before the disaster.  You will need written receipts to prove these repair and replacement costs.

To arrive at the  final deductible personal casualty loss which is  deductible on your tax return you must deduct $100 from the cost of repairs and also deduct 10% of your adjusted gross income for 2014 (that is the bottom line of page 1 of your form 1040).  You must also reduce the tax  loss by any reimbursement received from your insurance company.  

Business Casualty Losses on Your US tax return

This  would include damages to  real and personal property used in your sole proprietorship business, or rental property in Mexico.  If you business is operated through a Mexican corporation this rule does not apply unless you have for US tax purposes elected with the US IRS  to treat it as a disregarded entity on your US tax return.  These also apply to rental properties held in Fideicomisos also.

Again, you can deduct the lesser the reduction in fair market value of the business property or your adjusted basis in the real or personal property (cost minus depreciation taken for tax. This purposes).  The final deduction is arrived at by reducing the total of this figue by $100 plus any amount you have received as insurance reimbursement for the damage.

If your insurance reimbursement exceeds the amount of loss, you must report the excess amount received as a capital gain on your tax return.  For both both business and personal casualty losses no deduction is allowed for any amounts used to make improvements to the property to a better condition than it was in prior the hurricane.

You must use take the casualty deduction on Schedule A and itemized your deductions to write of your losses  as determined from the formulas above.

You can additional information and instruction in IRS publication 547 which can be downloaded at

Mexican Tax Advantages and Tax Return Deductions

Within days after Hurricane "Odile" hit Baja California Sur, a number of tax incentives were published, both at the Mexican Federal and State level. At the Federal level, the most important were the deferral of the monthly income tax advance payments and withholding taxes on wages, the immediate deduction of certain investments -in force until 31st March, 2015- and the establishment of a streamlined procedure for Value Added Tax refund.

At the State level, exemptions of the Lodging Tax -August through to December, 2014- and the unpaid Tax on the Ownership or use of Vehicles were published, along with a deferral in the payment of the payroll tax.

As regards the writing off  of losses derived from hurricane "Odile", companies and individuals taxed under the "Entrepreneurial Activities" regime are allowed the deduction of the undepreciated portion of the lost assets, provided  the original investment fully complied with the Mexican tax laws and regulations at the time it was carried out. It should be noted, however, that all amounts recovered by the taxpayer as a result of insurance payments, should be included as taxable income in the tax year they are received"

Both the US and Mexican tax rules are complex. Therefore, to achieve the maximum tax benefits available a consult a  tax expert should.


Don D. Nelson, Attorney, CPA is a US Tax Attorney who has been preparing returns and assisting with US tax planning for Americans living in Baja Sur for over 23 years.  His website is at  His email address for questions is  US phone 949-480-1235  and Mexican Phone in Los Cabos 624-131-5228

Santiago Solorzano.International Tax Attorney, Master's Degree in Taxation, LL.M. In International Taxation (Vienna),  Ph. D. Candidate (Pompeu Fabr La University, Barcelona), Tax Partner at Lexadvisors.  Email: , Ph. 624 142 5453

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