When disaster strikes whether natural or man-made homeowners, renters, and business owners may find themselves dealing with damage, destruction, or loss of property. Under certain circumstances, it’s possible to claim a tax deduction for these casualty losses. The Tax Cuts and Jobs Act (TCJA) generally suspends write-offs for such expenses for 2018 through 2025.
However, you can still claim deductions for personal property losses caused by certain federally declared disasters, such as the COVID-19 pandemic. In addition, the Taxpayer Certainty and Disaster Tax Relief Act enhanced deductions available to eligible individuals — but only for a limited time. Here are the details.
A casualty loss refers to damage, loss, or destruction of property resulting from a sudden, unexpected, or unusual event such as a hurricane, flood, fire, earthquake, or other disaster.
Importantly: for most taxpayers, only losses from federally declared disaster areas are eligible for deduction (for tax years 2018–2025). Losses covered by insurance or for which reimbursement is expected are generally not deductible.
Previously, personal casualty and theft losses even outside disaster zones could be deductible if they arose from a “sudden, unexpected, or unusual” event (fires, storms, thefts, etc.).
Taxpayers deducted the lesser of either their property’s adjusted basis or the drop in fair market value, minus any insurance reimbursements. Then, per loss event, they reduced by a fixed amount (e.g., $100), and finally by 10% of their Adjusted Gross Income (AGI).
With the passage of the Tax Cuts and Jobs Act (TCJA), personal casualty and theft losses generally became non-deductible unless the loss stems from a federally declared disaster.
As a result, everyday losses like theft, vandalism, or incidental damage no longer qualify unless they are tied to a qualifying disaster.
When you do qualify, the deduction is determined as follows:
If the result is zero or negative, then no deduction is allowed.
Normally, you claim the casualty loss in the tax year in which the disaster occurred. However, for federally declared disasters, there’s a special election of opting to claim the loss on the return for the year preceding the disaster either original or amended if that timing results in a greater tax benefit.
Losses to business assets or property used to produce income are treated more favorably. The $100-per-event and 10%-of-AGI thresholds do not apply for these business-related casualty deductions. That means your full uninsured loss may be deductible as a business expense, subject to other tax rules.
A key and often overlooked risk: if you receive insurance proceeds that exceed your property’s tax basis, you may end up with a taxable involuntary conversion gain, not a deductible loss.
For a principal residence destroyed in a disaster, special rules may allow you to exclude up to $250,000 (or $500,000 for married couples filing jointly) of the gain if you’ve owned and used the home as your main home for at least two of the previous five years.
If you still have a gain after the exclusion, you can defer the taxable gain by reinvesting the proceeds in similar property usually within two years (or four years for principal residences in disaster areas).
Losses due to normal wear and tear, gradual deterioration, insect or mold damage even if they eventually destroy property are not qualifying casualty losses. Misplaced items, lost money, or damage that isn’t sudden or unusual generally don’t qualify. If insurance covers the loss and you fail to claim, timely deduction may be reduced or disallowed.
Due to the changes introduced by the TCJA, most personal losses of vandalism, theft, and gradual damage do not qualify for a federal tax deduction. Only casualty losses tied to federally declared disasters may be deductible. For business or income-producing property, deductions are more accessible.
Before you claim anything, you should:
Taxpayers who don't itemize aren't able to claim any tax benefits from casualty losses — unless the loss was covered by the temporary relief provided by the Taxpayer Certainty and Disaster Tax Relief Act.
If you qualify for a casualty loss deduction, keep accurate records and evidence to support your deduction in case the IRS ever challenges the write-off. For more information, contact your tax advisor.
What happens if your business property — rather than your personal-use property — is stolen, destroyed or otherwise damaged by vandalism or another event? The rules for deducting business casualty and theft losses are generally similar to those for personal property losses, with a few notable exceptions.
Most important, the limits for individual casualty and theft loss deductions don't apply. In other words, you don't have to worry about the $100-per-event reduction or the 10%-of-adjusted gross income threshold. In general, business casualty and theft losses are fully deductible, regardless of whether the damage occurred in a federal disaster area. However, business losses are subject to the other restrictions, such as those related to salvage value and insurance reimbursements.
For example, if you operate a farm or restaurant that was unable to sell perishable food inventory during COVID-19-related lockdowns, any uninsured business property losses would be deductible under current tax law.
As with income-producing property, if business property is destroyed, the amount of your loss is your adjusted basis in the property. Any decrease in fair market value doesn't come into play. For more information, contact your tax professional.
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