Starting in 2018 and continuing through 2025, casualty losses are deductible only if they occur due to a federally declared disaster. All other casualty losses are no longer deductible during these years, subject to one exception--if you have a casualty gain. Prior to 2018, uninsured property losses you incurred due to a fire, theft, vandalism, earthquake, storm, floods, terrorism, or similar event were deductible as a casualty loss, an itemized deduction subject to certain limitations. However, the Tax Cuts and Jobs Act (“TCJA”) made major changes to this deduction.
Example: Ken’s suffers $25,000 in uninsured losses to his personal property when Hurricane Daisy strikes his and many other homes. The area in which Ken’s home is located is declared a federal disaster area by the President. Ken may deduct his loss, subject to the limitations discussed below.
Example: Mary suffers $25,000 in uninsured losses when her house burns down because she was sleeping in bed. This loss was not due to a federally declared disaster, thus she gets no casualty loss deduction.
There are two types of disaster declarations that the President can make: emergency declarations and major disaster declarations. Both qualify for the casualty loss deduction. An emergency declaration can be made if a state governor requests it and the President determines federal assistance is needed. The President can also unilaterally declare a major disaster for any natural event that he or she determines has caused damage of such severity that it is beyond the combined capabilities of state and local governments to respond. This includes hurricanes, tornadoes, storms, high water, wind-driven water, tidal waves, tsunamis, earthquakes, volcanic eruptions, landslides, mudslides, snowstorms, droughts, fires, floods, or explosions. You can find a list of federally declared disasters at www.disasterassistance.gov.
You may take a deduction for deductible 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. Moreover, the personal deduction for casualty losses to personal property is severely limited: You can deduct only the amount of all your casualty losses for the year that exceed 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 loss you suffered during the year. This reduction applies to each casualty loss.
Example: Ken from the example above had a $25,000 uninsured loss to his home from a hurricane that resulted in a disaster declaration. Ken’s 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).
You can only take a casualty loss deduction for the decline in your property's value. How much you may deduct depends on whether the property was 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 wholly or partly destroyed, you must figure your deduction separately for each item and then add them all together.
If the property is 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.)
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). You can obtain an appraisal by a competent appraiser to determine the reduction in fair market value of partly damaged property. However, this can be expensive. Instead of paying for an appraisal, the cost of cleaning up or of making repairs after a casualty can be used as a measure of the decrease in fair market value. But you can do this only if:
Casualty losses from a federally declared disaster are always deductible in the year the casualty occurred. However, 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.
It's quite common for a property owner to have a casualty gain instead of a casualty loss. This occurs when the insurance proceeds he or she receives exceed the adjusted basis in the damaged or destroyed property. A casualty gain is taxable income. However, taxpayers may claim casualty losses not due to federally declared disasters to offset such casualty gains during 2018 through 2025.
Example: Martha had a $100,000 casualty gain when her home was destroyed in a massive urban wildfire--a federally declared disaster. Later that same year, her vacation home was damaged in a windstorm and she suffered a $10,000 casualty loss--not a federally declared disaster. She may deduct the $10,000 loss from her $100,000 gain.
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: