Personal casualty and theft losses are deductible only when attributable to a federally declared disaster. This rule, temporary under the TCJA, is now permanent under the One Big Beautiful Bill Act.
A casualty is damage, destruction, or loss of property from a sudden, unexpected, or unusual event, such as fires, floods, hurricanes, tornadoes, earthquakes, or terrorist attacks.
Taxpayers report casualty and theft events on Form 4684. A separate form is required for each personal‑use casualty or theft.
General Rule
Personal casualty and theft losses are deductible only if:
- The loss is attributable to a federally declared disaster, or
- The taxpayer has personal casualty gains, which may offset non‑disaster losses
If personal casualty gains exceed non‑disaster losses, the excess gain reduces disaster losses.
Figuring a Casualty Loss
A casualty loss is the smaller of:
- The property’s adjusted basis, or
- The decrease in FMV due to the casualty
Minus:
- Insurance or other reimbursements (including amounts with a reasonable prospect of recovery)
Disaster Types Under the Stafford Act
There are two types of federal disaster declarations:
- Emergency Declaration
Losses are subject to:
- $100 reduction per casualty
- 10% of AGI reduction
- Major Disaster Declaration (Qualified Disaster Loss)
More favorable rules:
- Loss reduced by $500 per casualty
- No 10% of AGI reduction
- May be claimed even if not itemizing, as an increase to the standard deduction
A qualified disaster loss must be from a major disaster declared by the President. COVID‑19 declarations do not qualify.
Claiming the Loss
If Itemizing
- Report disaster losses on Schedule A, line 15
- Report net qualified disaster losses on Schedule A, line 16 as “Other Itemized Deductions”
If Not Itemizing
A taxpayer with a net qualified disaster loss may:
- Increase the standard deduction
- Still file Form 4684
- Enter the increased amount on Schedule A, line 16, then carry it to Form 1040 line 12
Election to Deduct Loss in the Prior Year
A taxpayer may elect to deduct a federally declared disaster loss on:
- The disaster year return, or
- The prior year return
This election can accelerate refunds.
The election must be made within 6 months after the regular due date (without extensions) of the disaster‑year return.
Determining the Disaster Year
A loss is sustained in the year:
- The disaster occurs, or
- The year reimbursement becomes reasonably certain
If reimbursement is uncertain, the loss is not sustained until the uncertainty is resolved.
Figuring a Gain
A casualty gain occurs when reimbursements exceed the property’s adjusted basis.
Gain = Amount received (including amounts paid to lienholders) minus Adjusted basis
Taxpayer may:
- Report the gain as a capital gain, or
- Elect to postpone the gain by acquiring replacement property within two tax years
Key Definitions
- Personal casualty gain — Gain from insurance or reimbursement exceeding basis
- Personal casualty loss — Loss from sudden, unexpected, unusual event
- Qualified disaster loss — Loss from a major disaster eligible for special rules