Taxpayers with casualty or theft losses may deduct such losses, the IRS states, but these losses must meet particular criteria and limitations. Casualty losses occur when an unexpected event causes damage or destruction of property. Examples of such events are the sudden power out in the middle of a storm, fires, earthquakes, or accidents. Theft losses happen when property is stolen. Casualty loss deductions can be claimed only for some losses. Most personal property losses are allowed only under federally declared disasters.
How much you are allowed to deduct
The amount claimed is limited to the lower of:
- The property’s adjusted basis prior to the loss (generally the original cost, plus improvements, less depreciation).
- The change in fair market value of the property caused by the event.
Any amount received from insurance or other reimbursements should be deducted from the loss amount.
For losses suffered in the case of federally declared disasters, the deductible amount should be subjected to specific thresholds: $100 deduction for each casualty, which is 10 percent of the taxpayer’s adjusted gross income (AGI).
However, for the qualified disaster losses of 2018, 2019, or 2020, the $100 threshold is increased to $500 and does not apply to the 10% AGI limitation.
Who qualifies for the deduction?
To qualify for a casualty or theft loss deduction, you must meet these fundamental criteria:
1. The loss must have been sudden, unexpected, or unusual (hurricane, tornado, theft, or vandalism) in causation.
Personal-use property losses are only deemed deductible when they qualify under a federally declared disaster.
Losses on business or income-producing property may be deductible regardless of a disaster.
Investment-related theft losses and other losses that have been suffered in an attempt to make a profit would be classified as such.
How to claim the deduction
If an individual desires to claim for the deduction on a casualty or theft loss under these criteria, claimants must do the following:
1. Determine the loss amount. Calculate the decrease in fair market value and subtract any reimbursement amounts.
2. Apply limitations to the deduction. Reduce the loss amount by $100 per casualty and 10 percent of AGI (unless a qualified disaster loss).
3. Report the Loss:
a. Form 4684 Casualties and Thefts is used to compute the deductible loss.
b. If the claim is made on an individual’s return, it should also be reported on Schedule A Form 1040 as an itemized deduction.
Investments and losses in business must be reported on Form 4797 Sales of Business Property or Schedule D Capital Gains and Losses.
4. Special Rules for Qualified Disaster Losses:
If the qualified disaster loss is claimed for 2018, 2019, or 2020, an amended return should be filed using Form 1040-X to receive that deduction.
Particular exceptions and rules
Qualified disaster losses (2018-2020)
The disaster tax relief had been extended by the Taxpayer Certainty and Disaster Tax Relief Acts in 2019 and 2020 to cover all federally declared disasters in 2018, 2019, and 2020. Taxpayers affected by any of these disasters are allowed to claim qualified disaster losses without the AGI 10-percent limitation, while the per-casualty reduction made increases from $100 to $500. These claims will be made on Form 4684 and may require an amended return (Form 1040-X).
Capital gains and qualified opportunity funds (QOFs)
Taxpayers realizing capital gains in 2024 are allowed to earn tax deferment by investing in a Qualified Opportunity Fund (QOF). This means that gains may not be taxed if the investment is kept for more than ten years. To access this benefit, report the gain in Form 8949 and file Form 8997 in tracking investments in QOF.
Exception for casualty gains
Should you sustain personal casualty losses as well as gains in a particular tax year, such losses may offset those gains in that taxable year. Personal casualty losses that are not a result of federally declared disasters, however, may still be allowed by deduction.
IRS help and other resources
Forms and Instructions: Get the forms you need on IRS.gov.
- Workbooks for casualty and theft losses: The IRS publishes for taxpayers to determine loss amounts the loss workbooks Publications 584 (for personal-use property) and 584-B (business property).
- Tax assistance: IRS Interactive Tax Assistant is the online assistant provided by the IRS at IRS.gov/Help/ITA specifically for tax casualty and theft losses reporting.
