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Casualty and Theft Losses

Your loss may be deductible, but the deduction is limited.

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected or unusual, such as: 

• car accidents
• sonic booms
• tornadoes
• earthquakes
• storms
• vandalism
• fires
• thefts
• other accidents
• floods
• hurricanes
• ship wrecks

The casualty must result from an event that is sudden, unexpected or unusual. Therefore, the following types of casualty losses will not qualify as a deductible casualty loss.

• Accidental breakage or damage done by a pet
• Car accident if caused by willful negligence
• Disease or insect damage to trees, shrubs, or plants
• Fire willfully set by taxpayer
• Progressive deterioration
• Termite or moth damage

The amount of the deductible casualty loss is calculated as follows:

1) The lesser of:

• Adjusted basis of the property before the casualty or theft, or
• Decrease in FMV of the property as a result of the casualty or theft

2) Minus any insurance reimbursement received or that is expected to be received. If the property is covered by insurance, an insurance claim must be filed - otherwise, the casualty loss is not allowed.

The amount of the deductible casualty loss is then further limited depending whether it’s use is business or personal.

• Personal-Use Property Deduction Limits
• $500 per casualty: Reduction applies to each event that causes the casualty or theft. For example: a tornado damages the house, garage, and car. There is only one $500 reduction, not three.
• 10% of AGI: Reduce the total of all casualty or theft losses on personal use property by 10% of AGI. Apply this reduction after the $500 per casualty reduction.
• The resulting deduction is taken as an itemized deduction on Schedule A. Consequently, if the taxpayer cannot itemize their deductions no casualty theft loss can be taken.
• Business and Income-Producing Property. Losses on business property and income-producing property are not subject to the $500 per casualty and 10% of AGI limits.

The National Disaster Relief Act of 2008 provides some tax benefits to taxpayers living in an federally declared disaster area. To qualify for the following provisions, the loss must be attributable to a federally declared disaster and occur in an area determined by the President to warrant federal assistance.

• Allows all taxpayers, not just those who itemize, to claim the casualty loss deduction regardless of the taxpayer’s adjusted gross income level.
• Increases the amount by which all individual taxpayers must reduce their personal casualty losses from each casualty from $100 to $500 for taxable years beginning after Dec. 31, 2008. The reduction amount returns to $100 for taxable years beginning after Dec. 31, 2009;
• Removes the requirement that the net casualty loss deduction be allowed only if the casualty loss exceeds 10 percent of the taxpayer’s adjusted gross income;

Related IRS Publications: 544, 547, 584