Can You Take a Theft Deduction for Building Contractor Fraud?

The Tax Cuts and Jobs Act eliminated personal casualty and theft loss deductions except for those related to a presidentially declared disaster.

For decades, uninsured losses of personal property due to theft have been tax deductible. For these purposes theft includes more than simple robbery. It also includes blackmail, burglary, embezzlement, kidnapping, and extortion. It even includes the taking of money or property through fraud or misrepresentation if illegal under state or local law.

However, the Tax Cuts and Jobs Act (TCJA), the massive tax reform law that took effect in 2018, made a huge change in the law. Starting in 2018 and continuing through 2025, theft and casualty losses to personal property are deductible only if they occur due to a federally declared disaster. These are major disasters that are so serious and widespread that state and local governments need federal help. This includes hurricanes, tornados, major storms, tidal waves, earthquakes, snowstorms, droughts, or floods. You can find a list of federally declared disasters at www.disasterassistance.gov.

All other theft and casualty losses are no longer deductible during these years.

Only Theft Losses Due to Natural Disasters are Deductible

Under the new rules, if your property is stolen in a simple home burglary, you may not take a theft loss deduction. But if your home is in a federally declared disaster area and your personal property is stolen or damaged by looters, you could take a theft loss deduction for your uninsured losses. To take the deduction, you would need to be able to prove your property was stolen--file a police report or get other proof that looters were present. Losses due to a theft outside the context of a natural disaster are not deductible theft losses during 2018 through 2025.

What about other theft losses arising from disasters? For example, what if your home is damaged or destroyed in a federal disaster and you are criminally defrauded by a contractor when you attempt to rebuild? Under prior law, criminal contractor fraud loss claims were deductible as theft losses. Under the new law, however, it's not entirely clear whether you could claim a theft loss deduction for this type of contractor fraud. It all depends on whether the IRS would consider such a theft loss as attributable to a federally declared disaster. Ordinarily, contractors are hired some time after a disaster has occurred. Would this mean any fraud they commit is not attributable to such a disaster? It's unclear. But it's probably worth attempting to claim the deduction anyway.

Special Rule for Theft and Casualty Gains

It's common for a property owner to have a theft or casualty gain instead of a loss. This occurs when the insurance proceeds you receive exceed the adjusted basis in the property. A theft or casualty gain is taxable income. However, you may claim theft or casualty losses not due to federally declared disasters to offset such theft or casualty gains during 2018 through 2025.

Example: Martha had a $100,000 casualty gain when her home was destroyed in a massive urban wildfire in 2020--a federally declared disaster. Later that same year her diamond necklace was stolen in a burglary and she suffered a $10,000 theft loss--not a federally declared disaster. She may deduct the $10,000 loss from her $100,000 gain.

Limits on Theft Loss Deduction

If a theft loss of personal property is attributable to a federally declared disaster, it is deductible as a personal itemized deduction on IRS Schedule A. Such losses are deductible only if, and to the extent, they exceed 10% of the taxpayer's adjusted gross income. Moreover, the first $100 of such losses are not deductible.

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