For tax years beginning after 2017, individuals may deduct casualty and theft losses of personal-use property only if the loss is attributable to a federally declared disaster (referred to as a "federal casualty loss"). This rule applies to losses from events such as fire, storm, shipwreck, or theft, but only when the event occurs in a federally declared disaster area. Casualty and theft losses not connected to a federally declared disaster are generally not deductible for personal-use property.
Deduction Limits for Federal Disaster Losses
- $100 Floor per Casualty: Each casualty or theft loss is reduced by $100 before applying further limits.
- 10% of AGI Rule: The total deductible loss is further reduced by 10% of your adjusted gross income (AGI). This applies to losses attributable to federally declared disasters.
- Qualified Disaster Loss Exception: If the loss is from a qualified disaster (as defined by the IRS), the $100 floor increases to $500, and the 10% AGI reduction does not apply.
Exception: Personal Casualty Gains
An exception exists if you have personal casualty gains during the tax year. In this case, you may deduct personal casualty losses not attributable to a federally declared disaster, but only to the extent that the losses do not exceed your personal casualty gains. Any excess gain can then be used to reduce deductible federal casualty losses. This rule is detailed in IRS Publication 547 and Form 4684 instructions.
When to Deduct the Loss
- Casualty Losses: Deduct in the tax year the casualty occurred, even if repairs or replacement occur later.
- Theft Losses: Deduct in the year you discover the property was stolen.
- Reimbursement Consideration: If you have a claim for reimbursement with a reasonable prospect of recovery, you cannot deduct the loss until you know with reasonable certainty that reimbursement will not be received.
Proof of Loss and Related Expenses
- You must provide documentation proving the casualty or theft occurred and support the amount claimed as a deduction.
- Related expenses (e.g., medical treatment for injuries, rental car costs) are not deductible as casualty or theft losses.
- Costs for future protection (e.g., levees) are not deductible but should be capitalized as permanent improvements.
Source:
Publication 547
Form 4684
Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. Consult a CPA or tax attorney for complex situations.