How to Claim a Tax Deduction for Casualty Losses

A casualty loss involves the damage or destruction of property from an event that is sudden, unexpected, or unusual. Claiming a tax deduction for such a loss requires understanding rules that have been reshaped by recent tax law changes. For individuals, the ability to claim this deduction now hinges on specific circumstances beyond the nature of the event. These changes have narrowed the scope of deductible personal losses, making careful documentation important.

Identifying a Qualifying Casualty Loss

A deductible casualty loss must stem from an event that is sudden, unexpected, and unusual. Sudden events are swift, like a hurricane, while progressive deterioration from termites is not. Unexpected events are unforeseen, and unusual events are not a day-to-day occurrence in the area.

Between 2018 and 2025, a loss to personal-use property, such as a home or vehicle, is only deductible if it occurs within a federally declared disaster area. The President makes this designation when an event is severe enough to warrant federal assistance. Taxpayers can verify if their location is part of a declared disaster area by checking the Federal Emergency Management Agency (FEMA) website.

For instance, if a home is destroyed by a fire, the loss is only deductible if that fire was part of a larger event, like a wildfire, that led to a federal disaster declaration. An isolated house fire, while a casualty, would not qualify for the deduction on personal property.

The rules differ for property used in a business or for producing income, as the federally declared disaster area requirement does not apply. If a commercial building is damaged by a qualifying event, the owner can claim a casualty loss deduction regardless of a federal disaster declaration.

Recent tax relief has also created a special category for “qualified disaster losses” for disasters declared between January 1, 2020, and early 2025. These qualified losses are subject to more favorable deduction rules.

Gathering Information to Substantiate Your Claim

To support your claim, you must gather specific financial information and documentation. The first piece of information is the adjusted basis of the property, which is its original cost plus significant improvements, minus any depreciation if used for business. For a personal residence, this is the purchase price plus the cost of additions like a new roof.

Next, you must determine the fair market value (FMV) of the property immediately before and after the casualty. FMV is the price at which the property would change hands between a willing buyer and seller. A professional appraisal is the most reliable method for establishing FMV and the diminished value afterward.

If an appraisal is not feasible, the cost of cleaning up or making repairs can be used as a measure of the decrease in FMV. This is acceptable if the repairs are necessary to restore the property to its pre-casualty condition, are not excessive, and only cover the damage sustained. The repairs cannot increase the property’s value beyond its pre-casualty state.

You must also document any insurance payments or other reimbursements you have received or expect to receive. A casualty loss deduction is only for amounts not compensated by other means, such as insurance policies or government grants. You must reduce your loss by the amount of these reimbursements.

Calculating the Deductible Loss Amount

The first step in calculating your loss is to determine the initial amount. This is the lesser of two amounts: your adjusted basis in the property or the decrease in the property’s fair market value (FMV) from the casualty. Using the lower of these two figures prevents a deduction from exceeding your actual investment in the property.

From this initial amount, you must subtract any insurance or other reimbursements you received or expect to receive. If a reimbursement exceeds your adjusted basis, you may have to report a taxable gain.

After accounting for reimbursements, further reductions apply based on the type of disaster. For personal casualty losses in a federally declared disaster, you must reduce the loss from each event by $100. Your total personal casualty losses for the year are then only deductible to the extent they exceed 10% of your adjusted gross income (AGI).

For example, if your unreimbursed loss was $30,000 and your AGI was $80,000, you would first reduce the loss by $100 to $29,900. Then, you would subtract 10% of your AGI ($8,000), resulting in a final deductible amount of $21,900.

For “qualified disaster losses,” the rules are more generous. For these specific losses, the reduction per casualty is increased to $500. Using the same $30,000 unreimbursed loss, you would simply reduce it by $500 for a final deductible amount of $29,500, as the 10% of AGI limitation does not apply.

The Deduction Claim Process

After calculating the final deductible amount, the loss is reported to the IRS on Form 4684, Casualties and Thefts. This form guides you through the calculation steps. Section A of the form is used for personal-use property, while Section B is for business or income-producing property.

How you claim the deduction on your tax return depends on the type of loss. For general disaster losses, the final amount from Form 4684 is transferred to Schedule A (Itemized Deductions) of Form 1040. You can only benefit from this deduction if you itemize and your total itemized deductions exceed the standard deduction.

For qualified disaster losses, you are not required to itemize. Because the 10% AGI limitation is waived for these losses, taxpayers can claim this deduction in addition to taking the standard deduction.

For any loss in a federally declared disaster area, you have a procedural option. You can claim the deduction on the tax return for the year the loss occurred or on the return for the year immediately preceding the loss. If a qualifying disaster loss happened in 2025, you could deduct it on your 2024 tax return, which may require filing an amended return to get a quicker tax refund.