Casualty Loss Tax Deductions Under the Law
A casualty loss is generally defined as an uninsured property loss related to a natural disaster, a fire, a flood, or criminal activity on the property. Under the Tax Cuts and Jobs Act, which went into effect in 2018, you cannot claim an itemized deduction for a casualty loss unless it resulted from a federally declared disaster, or unless you have a casualty gain. You can claim the deduction for the year in which you suffered the loss, or you can treat the loss as though it happened in the previous year. These rules will last until 2025.
The IRS frequently reviews claims of casualty deductions, so you will need to document any losses carefully. For example, you will need to be able to prove the original cost of the item that was damaged, stolen, or destroyed. If you improved the item before it was damaged, stolen, or destroyed, you must be able to document your improvements to it. You also must be able to provide proof of your ownership of the item and evidence of its fair market value. This might involve insurance documents and receipts for repairs to a damaged item.
Calculating the Casualty Loss Deduction
The deduction applies only to uninsured losses, and only to the extent that your losses exceed 10 percent of your adjusted gross income for the year. Each casualty loss is reduced by $100 before the total is calculated. Therefore, this deduction is rarely claimed.
If you are claiming a deduction based on property that was destroyed, you will need to calculate the casualty loss by subtracting the salvage value from the adjusted basis of the asset and then subtracting any insurance proceeds from the result. You can calculate the adjusted basis of the asset by adding the value of any improvements to its original cost.
If you are claiming a deduction based on property that was damaged but not destroyed, you will need to calculate the casualty loss as the decrease in its fair market value or its adjusted basis, whichever amount is less. While you can pay an appraiser to assess the decrease in the fair market value of an asset, many homeowners prefer to avoid this cost and instead calculate the decrease in fair market value as the cost of repairs after the loss. To use this alternative, you must actually make these repairs. The repairs must have been necessary and not unreasonably expensive. The repairs also must have been limited to the claimed loss, and they must not have improved the value of the property so that it is worth more than its value before the loss.
Deductions After Federally Declared Disasters
Major disaster declarations and emergency declarations are the two ways that the President declares a disaster. The President can issue a major disaster declaration in a situation in which the state and local governments cannot handle the consequences of a natural disaster. The President can issue an emergency declaration in response to a request by a state governor if the President decides that the state requires federal assistance to deal with the disaster.
Deductions Based on Casualty Gains
Sometimes a homeowner receives a casualty gain, which is classified as taxable income. A casualty gain means that the insurance money that the homeowner received is greater than the adjusted basis in the property that sustained the loss. To compensate for taxes on casualty gains, a homeowner who receives this type of gain can deduct casualty losses that did not arise from federally declared disasters.
