The Casualty and Theft Loss Tax Deduction
The Internal Revenue Code may allow you to deduct unreimbursed losses
caused by the recent hurricanes.
This page outlines the general provisions of the code - it is not to be taken as tax advice.
Please consult your tax professional for details and how you may qualify / benefit.
Qualification for Casualty and Theft Loss Deduction
To qualify, the taxpayer must meet the following criteria:
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A. Type of Loss
The loss must result from a sudden, unexpected, or unusual event, such as:
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Natural disasters (e.g., hurricanes, earthquakes, tornadoes).
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Accidents (e.g., a tree falling on your house due to a storm).
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Theft (e.g., burglary or embezzlement).
B. Ownership and Use
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The loss must involve property owned by the taxpayer.
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For personal-use property (e.g., your home, car), the loss is deductible under specific conditions.
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Losses involving business or income-producing property (e.g., rental property) are treated differently, with more favorable rules.
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C. Timing
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The loss must occur in the tax year for which the deduction is claimed.
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For theft, the loss is deductible in the year it is discovered, not necessarily when the theft occurred.
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D. Federally Declared Disaster Areas
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For personal-use property, starting in 2018 (under the Tax Cuts and Jobs Act), casualty loss deductions are generally limited to losses incurred in a federally declared disaster area.
To qualify, the taxpayer must meet the following criteria:
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A. Type of Loss
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The loss must result from a sudden, unexpected, or unusual event, such as:
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Natural disasters (e.g., hurricanes, earthquakes, tornadoes).
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Accidents (e.g., a tree falling on your house due to a storm).
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Theft (e.g., burglary or embezzlement).
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Gradual damage (e.g., wear and tear, termite damage) typically does not qualify.
B. Ownership and Use
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The loss must involve property owned by the taxpayer.
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For personal-use property (e.g., your home, car), the loss is deductible under specific conditions.
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Losses involving business or income-producing property (e.g., rental property) are treated differently, with more favorable rules.
C. Timing
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The loss must occur in the tax year for which the deduction is claimed.
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For theft, the loss is deductible in the year it is discovered, not necessarily when the theft occurred.
D. Federally Declared Disaster Areas
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For personal-use property, starting in 2018 (under the Tax Cuts and Jobs Act), casualty loss deductions are generally limited to losses incurred in a federally declared disaster area.​
Calculating the Deduction
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The calculation varies depending on whether the loss involves personal-use property or business/income-producing property.
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For Personal-Use Property
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Determine the Loss:
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The loss is the lesser of:
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The decline in the property’s fair market value (FMV) due to the casualty or theft.
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The adjusted basis of the property (generally, the original purchase price plus improvements).
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Reduce by Insurance and Reimbursements:
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Subtract any insurance or other reimbursements received.
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Apply the $100 Floor:
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Subtract $100 per casualty or theft event.
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Reduce by 10% of Adjusted Gross Income (AGI):
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Subtract 10% of the taxpayer’s AGI from the total loss.
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Example Calculation:
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A taxpayer's home has an adjusted basis of $200,000 and FMV of $250,000.
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A hurricane reduces the FMV to $180,000, causing a loss of $70,000.
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The taxpayer receives $50,000 in insurance reimbursement.
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The taxpayer’s AGI is $100,000.
Steps:
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Loss = Lesser of ($70,000 decrease in FMV or $200,000 adjusted basis) = $70,000.
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After insurance reimbursement: $70,000 - $50,000 = $20,000.
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Subtract $100: $20,000 - $100 = $19,900.
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Reduce by 10% of AGI: $19,900 - ($100,000 × 10%) = $9,900.
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Deduction = $9,900.
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For Business or Income-Producing Property
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The loss is generally the adjusted basis of the property or the decline in FMV, whichever is lower.
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No $100 floor or 10% of AGI reduction applies.
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Fully deductible as a business expense.
Documentation Requirements
Taxpayers must keep detailed records to substantiate the loss, including:
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Description of the property.
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Nature of the casualty or theft.
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FMV before and after the event (appraisals are often needed).
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Proof of insurance claims and reimbursements.
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Records showing when and how the loss occurred.
Reporting the Deduction
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Casualty and theft losses are reported on Form 4684 ("Casualties and Thefts").
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The total allowable deduction is then transferred to Schedule A (Itemized Deductions) for personal losses or to the appropriate schedule for business losses.
Limitations Under Recent Laws
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For tax years 2018 through 2025, personal casualty loss deductions are limited to federally declared disaster areas unless the taxpayer has net casualty gains (e.g., insurance proceeds exceed the losses).
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By adhering to these rules and properly calculating the deduction, taxpayers can potentially recover part of their financial losses due to unforeseen events.