Disaster and Taxes: Understanding Casualty Loss
Marshall, North Carolina, a town of about 800 people, was more or less wiped off the map on Sept. 27, 2024, by Hurricane Helene. Residents said they had never seen the river rise so quickly or so high. The powerful storm surge flooded the town, leaving devastation in its wake. It’s a human disaster, but also a financial one.
Calculating the losses
You may deduct personal casualty losses related to your home, household items and vehicles on your federal income tax return. The losses may not be connected to a trade or business and must have happened in a federally declared disaster area. Personal casualty losses not incurred in a federally declared disaster area are not deductible (for years 2018 to 2025).
A casualty loss can result from the damage, destruction or loss of property from any sudden, unexpected or unusual event such as a flood, hurricane, tornado, fire, earthquake or volcanic eruption. A casualty doesn’t include normal wear and tear or progressive deterioration.
The IRS recognizes three types of casualty losses related to federally declared disasters: federal casualty losses, disaster losses and qualified disaster losses. There are different requirements for each. For more information, see Publication 547, Casualties, Disasters and Thefts, or refer to the instructions for Form 4684.
Calculating the loss
When calculating the amount of a casualty loss on personal-use property that is damaged (but not completely destroyed), the deductible loss is limited to the lesser of:
- The property’s adjusted basis (the original purchase price adjusted for factors such as depreciation or improvements)
- The decrease in fair market value due to the damage, measured as the difference between the property’s FMV immediately before and after the casualty event
You may determine the decrease in FMV by appraisal or, if certain conditions are met, by the cost of repairing the property.
If your personal-use property is completely destroyed in a casualty event, the deductible loss is calculated as the lesser of:
- The property’s adjusted basis (original purchase price adjusted for factors such as depreciation or improvements)
- The fair market value of the property immediately before the casualty event
Whether your property is partly or fully destroyed, you must reduce the casualty loss by any salvage value and by any insurance or other reimbursement you receive or expect to receive.
Completing the IRS forms
If you have a casualty loss, you may claim an itemized deduction on your individual tax return on Form 1040, Schedule A, Itemized Deductions. For personal-use property, you must subtract $100 from each casualty event that occurred during the year after you’ve subtracted any salvage value and any insurance or other reimbursement. Then, add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses. This rule ensures that only substantial losses relative to one’s income are eligible for deduction.
If you have a qualified disaster loss, you may elect to deduct the loss without itemizing your deductions. Your net casualty loss doesn’t need to exceed 10% of your adjusted gross income to qualify for the deduction, but you would reduce each casualty loss by $500 after any salvage value or any other reimbursement.
You may wish to use Publication 584, Casualty, Disaster and Theft Loss Workbook, to document details about the loss, calculate the deductible amount and keep accurate records for tax purposes.
Further details
Casualty losses are generally deductible in the year you sustain the loss. However, if you have a casualty loss from a federally declared disaster in an area eligible for public or individual assistance, you can choose to claim the deduction in the prior tax year (through an amended return). This often provides financial relief more quickly.
If your deductions, including your loss deduction, are more than your income, you may have a net operating loss. You don’t have to be in business to have an NOL from a casualty — see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates and Trusts.
When the amount you receive from insurance or other reimbursements is more than the cost or the adjusted basis of the property, you typically have a capital gain. If you have a personal casualty gain in any tax year, you may be able to deduct the portion of the personal casualty loss not attributed to a federally declared disaster as long as the loss doesn’t exceed the personal capital gain.
©2024