What Is a Casualty Loss and How Do You Claim It?

A casualty loss arises from unexpected and sudden events that damage or destroy your property. The tax code may offer some relief by allowing a deduction for qualifying events. Understanding the criteria for these losses and the process for claiming them is important for individuals seeking to mitigate their financial burden. This guide provides an overview of casualty losses, detailing what qualifies, how to determine the loss amount, and the steps involved in claiming the deduction.

Defining a Casualty Loss

A casualty loss refers to the damage, destruction, or loss of your property due to an event that is sudden, unexpected, or unusual. A “sudden” event is swift and not gradual or progressive. For instance, damage from a rapid flood is sudden, unlike damage from slow erosion.

An “unexpected” event is ordinarily unanticipated and unintended by the taxpayer. This means the loss was not deliberately caused. An “unusual” event is not a day-to-day occurrence and is not typical of the activity in which you were engaged.

These three characteristics—sudden, unexpected, and unusual—form the foundation for a qualifying casualty loss. The event must be identifiable and result in physical damage to tangible property. This framework helps differentiate genuine casualty losses from routine damages or those resulting from neglect.

Qualifying Events and Exclusions

Many types of events can lead to a qualifying casualty loss, provided they meet the “sudden, unexpected, or unusual” criteria. Natural disasters are common examples, including floods, hurricanes, tornadoes, earthquakes, and volcanic eruptions. Fires, unless willfully set, also qualify. Other qualifying events include car accidents not caused by willful negligence, vandalism, and theft. Damage from a sonic boom or a government-ordered demolition due to an unsafe condition after a disaster also qualifies.

However, many types of property damage or loss do not qualify as casualty losses. Damage from progressive deterioration, such as rust, corrosion, or ordinary wear and tear, is excluded. This also applies to issues like termite damage, disease, or insect infestation, as these are gradual processes rather than sudden events. Losses from accidental breakage of personal items under normal conditions or damage caused by pets are not deductible. Losses due to market conditions or a decline in property value unrelated to physical damage do not qualify.

Determining Your Loss Amount and Documentation

Calculating your casualty loss involves specific steps to determine the deductible figure. For personal-use property that is damaged but not completely destroyed, the loss is the lesser of two values: the decrease in the property’s fair market value (FMV) immediately after the casualty, or the adjusted basis of the property immediately before the casualty. The adjusted basis represents your cost in the property, including improvements, minus any depreciation or prior losses. If personal-use property is completely destroyed, the same rule applies. For business or income-producing property that is completely destroyed, the loss is the adjusted basis minus any salvage value and reimbursements.

From this calculated loss, subtract any insurance reimbursements or other compensation received or expected. Only the unreimbursed portion of the loss is deductible. If insurance proceeds exceed your adjusted basis, you may have a taxable gain.

Thorough documentation is important to support your claim. Key documents include:

• Evidence of the property’s condition before and after the event, such as photographs or videos.
• Appraisals from qualified professionals to determine FMV before and after the casualty.
• Repair estimates from contractors, which can serve as evidence of the decrease in FMV if repairs restore the property to its pre-casualty condition.
• Police reports for theft or vandalism.
• Detailed receipts for affected property and improvements, important for establishing your adjusted basis.
• Records of insurance claims and reimbursements received.

Tax Implications and Claiming the Deduction

For tax years 2018 through 2025, personal casualty losses for individuals are deductible only if the loss is attributable to a federally declared disaster. This means that losses from events not in federally declared disaster areas, such as a localized house fire, are not deductible. A federally declared disaster is one determined by the President to warrant federal assistance.

When a personal casualty loss is deductible, it is subject to two main limitations. First, subtract $100 from each casualty event. This $100 per-casualty floor applies to each separate event. Second, after applying the $100 reduction, your total personal casualty losses for the year must exceed 10% of your adjusted gross income (AGI) to be deductible. Only the amount exceeding this 10% AGI threshold can be claimed.

Casualty losses are reported on Form 4684, Casualties and Thefts. This form calculates the deductible amount and is attached to your federal income tax return. For personal-use property, use Section A of Form 4684. The loss must be deducted in the tax year the casualty occurred. However, if the loss is from a federally declared disaster, you may elect to deduct it in the tax year immediately preceding the year the disaster occurred by filing an amended return for that prior year. This election can result in a quicker refund.