Guide to Federal Casualty Loss Deductions

Hurricanes, tropical storms, earthquakes, and wildfires can wreak havoc on homes, businesses, and communities. Rebuilding from the loss can be painful not only emotionally but also financially. 

Federal casualty loss deductions are designed to help individuals and businesses stem financial loss from natural disasters and theft. However, under current law, casualty loss deductions for individuals are severely limited, making the deduction unavailable to most. 

When Are Casualty Losses Deductible? 

Through 2025, individuals can only deduct casualty losses that occur as part of a federally declared disaster approved by the U.S. president. Casualty loss deductions can only be claimed for damage to your home, household items, and vehicles. Losses related to theft generally aren’t deductible. Also, individuals must itemize their deductions to claim casualty loss deductions. 

Natural disasters that bring significant damage often become federally declared disasters that the President clears to receive federal aid, including casualty loss deductions. Still, restrictions in place through 2025 severely limit the availability of the casualty loss deduction for individuals.  

For example, a windstorm that causes a tree to fall on your house won’t allow you to claim a casualty loss deduction. Businesses, however, can deduct casualty losses regardless of whether they occurred as part of a federally declared disaster. 

How To Calculate the Casualty Loss Deduction 

Calculating the casualty loss deduction is a two-step process: 1. compute the casualty loss amount and 2. apply deduction limitations. 

Step 1: Determine the Casualty Loss Amount 

Start with the lesser of 

• The adjusted basis of the property, or 

• The decrease in fair market value of the property as a result of the casualty. 

Reduce this amount by any insurance proceeds (received or expected) to arrive at the casualty loss amount. 

Let’s say an individual paid $250,000 for their primary residence, which was worth $325,000 immediately before the casualty loss. A tropical storm brought severe floods that caused the home to be worth $250,000. The individual’s flood insurance paid $65,000 to repair the damage. 

The individual’s casualty loss amount is $10,000: The lesser of the adjusted basis ($250,000) or the drop in fair market value ($325,000 – $250,000, or $75,000) minus insurance proceeds ($65,000). 

Businesses can typically stop at Step 1; the allowable casualty loss deduction for businesses is generally the casualty loss amount. However, there are exceptions for losses involving employee property or a business owner’s home office. 

Step 2: Apply Casualty Loss Deduction Limitations 

Unlike businesses, individuals can’t claim a loss deduction for their entire casualty loss amount. Two limitations apply: 

• A $100 per-casualty-event reduction 

• A 10%-of-adjusted-gross income reduction 

Let’s pick up the example we started in Step 1, where we determined that the casualty loss amount was $10,000. The $100 per-event reduction brings the loss amount to $9,900. 

From there, we must further reduce the amount by 10% of the individual’s adjusted gross income. If the individual’s adjusted gross income is $75,000 for the year, the loss amount goes down by another $7,500, bringing the loss amount to $2,400. 

If the individual itemizes their deductions, they can claim a $2,400 deduction for the damage done to their home. The deduction can be claimed on the individual’s prior-year tax return—potentially allowing the individual to amend the return to receive a near-immediate tax refund—or on the individual’s current-year tax return. 

Note how a subtle change in the example’s facts can totally change the outcome. For example, no deduction would’ve been available if the individual’s adjusted gross income was $125,000 instead of $75,000. That’s because 10% of $125,000 is $12,500, which is greater than the casualty loss amount. 

Tips for Documenting Casualty Losses 

The IRS requires a substantial amount of information to calculate the casualty loss deduction. Here’s what you’ll need to help your tax advisor determine the amount of federal tax relief after a covered loss: 

• List of property that was damaged or destroyed 

• Prices paid for damaged or destroyed property 

• Prices paid for improvements made to a home before it was damaged or destroyed 

• Appraisals of damaged or destroyed property before (if available) and after the loss event 

• Claims submitted to your insurance company 

• Records of insurance proceeds received or expected to be received 

With this information, your tax advisor can look into whether a casualty loss deduction is available to you. 

Smith + Howard is dedicated to helping its clients navigate difficult situations. Contact an advisor to discuss the availability of disaster relief in the form of delayed tax filing deadlines and accelerated refunds.