Casualty Loss Deduction

• The casualty loss deduction is available for the loss in value of your personal property that is the direct result of a casualty event. A casualty is a swift and unexpected event that causes property damage, such as a tornado or hurricane. If a casualty causes severe damage to your home's roof and you must replace it, some of your costs are deductible, but only if you itemize your tax deductions. However, you must first reduce your total loss by $100. From this amount you reduce it again by 10 percent of your Adjusted Gross Income (AGI). If your AGI exceeds the roof replacement costs, your deduction will be zero.
  
  

Financing Roof Costs

• If you take out a second mortgage or use a home-equity line of credit to finance the replacement of your roof, you can claim a deduction each year for the interest you pay on the loan. The interest deduction is available in addition to any casualty loss you claim. However, the IRS requires that your lender take a security interest in your home, meaning it has the right to foreclose on your property if you fail to repay the loan. Additionally, the home in which it takes a security interest must be a qualified home, i.e., your main residence plus one additional residence. If you use a home equity loan, the IRS also limits the deduction to the interest that accrues on the smaller of $100,000 or the equity you have in your home.
  
  

Home Improvement

• Replacing the entire roof of your home qualifies as a permanent home improvement since it increases the value of your home and extends its useful life. As a result, the IRS allows you to increase your tax basis in the home by the cost of the roof replacement. Your tax basis already includes the price you purchase the home for plus most of the closing costs. When you replace the roof, you can increase the tax basis by the cost of all necessary supplies. If you don't replace the roof yourself, you can increase the tax basis by the cost of hiring a contractor.
  
  

Recovering Roof Improvements

• Not all costs that you include in your tax basis, including the cost of replacing your roof, are subject to the capital gains tax when you sell the home. For example, suppose your tax basis in the home is $200,000 and the cost of replacing the roof is $10,000; your new tax basis is now $210,000. If you sell the home for $250,000, your capital gain is only $40,000 rather than $50,000. This is especially valuable if the home on which you replace your roof is not your main residence and ineligible for the home gain exclusion.