Casualty Loss Deduction for Damage to Your Principal Residence

A casualty loss is damage to your property resulting from a sudden, unexpected, or unusual event. Events like fires, hurricanes, tornadoes, floods, and earthquakes fall under this definition. The tax code provides a way to receive some financial relief in the form of a deduction for these losses. This deduction can help to partially offset the financial burden of repairing or rebuilding your home.

Qualifying for the Deduction

To claim a deduction for a casualty loss to your personal residence, the loss must occur in a federally declared disaster area. This requirement applies specifically to personal losses, not business losses. A federally declared disaster is an event that the President of the United States has determined is severe enough to warrant federal assistance. You can verify if your location has been designated a federally declared disaster area by visiting the Federal Emergency Management Agency (FEMA) website.

Damage from progressive deterioration, such as a slow leak in a roof or termite infestation, does not qualify because it is not a sudden event.

Calculating the Amount of Your Loss

To calculate your economic loss, you must determine the lesser of two figures: your adjusted basis in the property or the decrease in its fair market value (FMV). Your adjusted basis is the original cost you paid for the property, plus the cost of any significant improvements you have made. Improvements are additions that add to the value of your home or prolong its useful life, such as adding a new room or installing a new roof. Repairs, in contrast, are actions that maintain your home in good condition but do not add to its value, such as painting a room.

Next, you must determine the decrease in the FMV of your property as a result of the casualty, which is the difference between the property’s value immediately before and after the event. An appraisal from a qualified professional is a common way to determine this decrease. The cost of repairing the damage can also be used as a measure of the decrease in FMV, as long as the repairs are necessary to restore the property and are not excessive. You must then reduce this loss amount by any insurance payments or other reimbursements you have received or expect to receive.

Determining the Deductible Amount

After calculating your initial loss and subtracting any insurance reimbursements, you must apply certain limitations to arrive at the final deductible amount. For most federally declared disasters, you must first reduce your loss by $100 for each casualty event. After this reduction, you can only deduct the total of all your casualty losses for the year to the extent that they exceed 10% of your Adjusted Gross Income (AGI).

However, more favorable rules apply to certain “qualified disaster losses,” including those from disasters declared between January 1, 2020, and early 2025. For these specific losses, the reduction is $500 per casualty. More importantly, the 10% of AGI limitation is waived entirely, which can result in a significantly larger deduction.

How to Claim the Deduction

The primary form for reporting the loss is IRS Form 4684, Casualties and Thefts. Section A of the form is used for personal-use property, such as your principal residence. You will need to enter information including:

• A description of the property
• The date you acquired it
• Your adjusted basis
• The fair market value before and after the casualty
• Any insurance reimbursements

If you itemize, you will report the loss on Schedule A. For qualified disaster losses, you can claim the deduction even if you take the standard deduction. For any federally declared disaster, you can choose to deduct the loss in the tax year it occurred or on an amended return for the prior tax year. Choosing the prior year may be advantageous if you had a higher income in that year.

Maintain thorough records to support your claim. These records should include appraisals, photographs of the damage, receipts for repairs, and copies of insurance settlement documents.