Diminution of value occurs when a vehicle is wrecked or damaged in an accident. The vehicle is subsequently repaired or restored to road-worthy condition, and the insurance company agrees to pay the auto claim for the repairs. The car is now inherently worth less, even though it may not appear significantly different than it did before the accident.
Even if your car was repaired to “like new” condition, it now carries a damage history that will affect its resale value. Should you decide to sell the vehicle or trade it to a dealership, the diminished value will be less than you would expect to receive had the vehicle never been damaged. If your accident was caused by a third party, a diminished value claim against their insurer can allow you to reclaim some of your losses, but did you know that any part of the loss not reimbursed by the insurance company is tax deductible?
When your car is damaged in an accident and you file a claim with their insurance company, you are entitled to deduct any amount that isn’t reimbursed by the claim. This loss may be the result from an insurance deductible, losses that exceed your policy limits, or the undervaluation of property by the insurance company.
Property losses are reported on IRS Form 4684 and Schedule A of form 1040. You are not required to submit documentation with your tax return, but it’s a good idea to keep records in case you are ever subject to an IRS audit. Your records should include the amount of property loss, the amount of any reimbursement, proof of legal ownership of any damaged or destroyed property, and details of the accident (including whether it was or was not your fault).
You may be asking yourself “Why do I need to document details of the accident?” You are not allowed to claim a tax deduction for an accident that resulted from your own negligence or a willful act. Running a stop light or driving under the influence negates your ability to make a claim. Likewise, if you have given another driver permission to drive your car and that driver causes an accident, you cannot claim the deduction based on that driver’s negligence or willful accident.
A diminished value appraisal can assist you in determining the amount of loss you can claim as an itemized tax deduction on Form 4684 on your Federal tax return. In many cases, the cost of the car appraisal can also be claimed as an itemized deduction. More importantly, an appraisal performed by a certified appraisal company can help determine both the original value of the vehicle and the current value after repairs are completed. This will give you an accurate idea of the loss of value.
If you have had an accident and are trying to determine how you should report your diminished loss, contact AAG today for a diminished loss appraisal and save money on your taxes this year!