Generally, taxpayers may deduct casualty and theft losses relating to your home, household items and vehicles on their federal income tax return. The IRS would like taxpayers who experience certain types of major personal casualties recover some of their losses through tax savings. If a fire, theft, vandalism, earthquake, storm, floods, terrorism, or similar event damages your property, you may have undergone a casualty loss, which can be deductible as an itemized deduction on your return.
What is a casualty loss?
A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration. The deduction is only available for physical damage or loss to your property. Medical losses are not casualty losses and cannot be deducted under this rule. Casualty losses are treated differently depending on whether the loss occurred to property used in your trade or business, to generate investment income, or for personal or family purposes.
Deducting Casualty Loss or Theft
A casualty loss is not allowed when the loss is gradual, such as insect damage to trees or water damage from a leaky roof. Therefore, damage or destruction resulting from progressive deterioration of property, such as beachfront erosion, would not qualify as a casualty loss. Loss of property through theft is deductible, but merely misplacing property is not.
How to Calculate and Claim Casualty Loss?
A casualty loss is measured as the lesser of (a) the drop in value and (b) your basis in the property. Remember, for income tax purposes, only losses to property are deductible as a casualty loss. You can’t deduct the loss of future earnings if your business is damaged in a fire, nor can you deduct the loss of time you spent cleaning up after the fire.
It may be difficult to establish these elements and original receipts showing actual costs are necessary. If the casualty loss is big, an appraisal might be required.
Limitations Casualty Loss Deduction.
There are three main limitations on deducting a loss on your tax return as an itemized deduction.
- If you are insured, you must reduce your loss by your reimbursement.
- For each casualty, you must reduce your loss amount by $100. Note that this reduction is per “event,” not per item damaged.
- After combining all your losses under the above guidelines, you must reduce them by 10% of adjusted gross income (AGI). Only the loss amount above this “floor” can be deducted. The 10%-of-AGI limit on casualty losses is waived for federally declared disasters in 2008 and 2009.
When to take Casualty Loss Deduction
The deduction must be taken in the year the loss is incurred (or, for a theft, the year it’s discovered by the taxpayers). Individual taxpayers who do not itemize deductions cannot deduct their casualty losses. Following these rules should provide a guideline to determine if the loss of property is deductible on a tax return. If your loss deduction is more than your income, you may have a net operating loss. You do not have to be in business to have a net operating loss from a casualty.
How much can you deduct on a casualty loss?
The amount of the loss is further reduced by any amounts covered by your insurance company, regardless of whether or not you file a claim. After the loss is determined and the insurance reimbursement is subtracted, the loss deduction is generally reduced by $100 for each casualty, any casualty gains, and 10 percent of your adjusted gross income.
IRS Forms and Publications on Casualty Losses
Report casualty and theft losses on Form 4684, Casualties and Thefts. Use Section A for personal-use property and Section B for business or income-producing property. If personal-use property was damaged, destroyed or stolen, you may wish to refer to Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). For losses involving business-use property, refer toPublication 584-B Business Casualty, Disaster, and Theft Loss Workbook.