If a fire, theft, vandalism, earthquake, storm, floods, terrorism, or similar event damages your property, you may have undergone a casualty loss, which can be deductible as an itemized deduction on your return.
Casualty losses are damage to property caused by fire, theft, vandalism, earthquake, storm, floods, terrorism, or some other sudden, unexpected, or unusual event. There must be some external force involved for a loss to be a casualty loss. Thus, you get no deduction if you simply lose or misplace property, or it breaks or wears out over time.
You may take a deduction for casualty losses only to the extent that the loss is not covered by insurance. Thus, if the loss is fully covered, you’ll get no deduction.
The personal deduction for casualty losses to personal property is severely limited: You can deduct only the amount of the loss that exceeds 10% of your adjusted gross income for the year. This greatly limits or eliminates many casualty loss deductions. To add insult to injury, you must also subtract $100 from each casualty or theft you suffered during the year. This reduction applies to each total casualty or theft loss. It does not matter how many pieces of property are involved in an event. Only a single $100 reduction applies.
Example: Ken’s suffers $5,000 in losses to his personal property when a fire strikes his home. His adjusted gross income for the year is $75,000. He can deduct only that portion of his loss that exceeds $7,500 (10% x $75,000 = $7,500). He lost $5,000, so he gets no deduction.
How much you may deduct depends on whether the property involved was stolen or completely destroyed or only partially destroyed. You must always reduce your casualty losses by the amount of any insurance proceeds you actually receive or reasonably expect to receive. If more than one item was stolen or wholly or partly destroyed, you must figure your deduction separately for each item and then add them all together.
If the property is stolen or completely destroyed, your deduction is figured as follows: Adjusted Basis – Salvage Value – Insurance Proceeds = Casualty Loss. (Your adjusted basis is the property’s original cost, plus the value of any improvements.) Obviously, if an item is stolen, there will be no salvage value.
Example: Sean’s computer is stolen from his apartment by a burglar. The computer cost $2,000. Sean has taken no tax deductions for it because he purchased it only two months ago, so his adjusted basis is $2,000. Sean is a renter and has no insurance covering the loss. Sean’s casualty loss is $2,000. ($2,000 adjusted basis – $0 salvage value – $0 insurance proceeds = $2,000.)
If the property is only partly destroyed, your casualty loss deduction is the lesser of the decrease in the property’s fair market value or its adjusted basis (your basis is reduced by any insurance you receive or expect to receive).
Example: Assume that Sean’s computer (from the example above) is partly destroyed due to a small fire in his home. Its fair market value in its partly damaged state is $500. Because he spent $2,000 for it, the decrease in its fair market value is $1,500. Sean didn’t receive any insurance proceeds so the computer’s adjusted basis is $2,000. Thus, his casualty loss is $1,500.
When to Deduct Casualty Losses
Casualty losses are always deductible in the year the casualty occurred. However, if you have a casualty loss from a federally declared disaster that occurred in an area, you have another option: You can treat the loss as having occurred in the prior year, and deduct it on your return or amended return for that tax year. This way, you can get a quick tax refund.
Record Keeping for Casualty Losses
Casualty losses are a hot ticket item for the IRS. Claiming them will increase your chances of being audited. Make sure you can document your losses. You’ll need to have:
- documents showing that you owned each asset you claimed was damaged, stolen, or destroyed—for example, a deed or receipt
- contracts or purchase receipts showing the original cost of the item, plus any improvements you made to it, and
- evidence of the property’s fair market value, such as insurance records, an appraisal, or receipts for the cost of repairing it.