Suppose your home or other personal (non-business) property is damaged or destroyed in a disaster such as the recent Los Angeles fires or North Carolina floods.
In that case, you might qualify to deduct your uninsured losses from your income taxes. Recent changes in the law make this complex deduction easier to obtain.
Only Losses Due to Federal Disasters Are Deductible
Property losses caused by sudden, unexpected, or unusual events such as fires, floods, earthquakes, and hurricanes are called casualty losses. In the past, all types of casualty losses were deductible, but the Tax Cuts and Jobs Act of 2017 radically changed the rules.
From 2018 through 2025, casualty losses to non-business property such as your home, belongings, or car will be deductible only if a federally declared disaster causes them.
All other casualty losses to personal non-business property are not directly deductible during these years—they may be deducted only from casualty gains (which you may have).
Example 1. In 2025, a federally declared disaster (a wildfire) destroyed your home. You can take a casualty loss deduction for your uninsured losses.
Example 2. In 2025, an accidental house fire due to a faulty fireplace (no federal disaster) destroyed your home. You get no casualty loss deduction.
Key point. You can have a casualty gain. That’s a taxable event. For some ideas on how to deal with the gain, see Wildfires, Floods, Hurricanes: How the IRS Has Your Back.
The U.S. president can make two types of disaster declarations under the Robert T. Stafford Disaster Relief and Emergency Assistance Act: emergency declarations and major disaster declarations.2 Both can qualify for the casualty loss deduction.3 The Federal Emergency Management Agency (FEMA) lists declared disasters on its website.
The Tax Cuts and Jobs Act limitations on deducting casualty losses expire at the end of 2025. But Congress could extend them to 2026 and later, or even make them permanent.
Only Uninsured Disaster Losses Are Deductible
Many, but far from all, disaster losses are covered by insurance. You may deduct such losses only to the extent they are not reimbursed by insurance or otherwise.
If a loss is insured, you must file a timely claim, even if it will result in the cancellation of your policy or an increase in premiums. If you don’t file a claim, your loss deduction is reduced by the amount for which you should have filed a claim.
Technical note. Business losses are different. You can deduct a complete business casualty loss without filing an insurance claim.
You can’t claim your Form 1040 casualty loss until you know with reasonable certainty whether or not you’ll receive insurance or other reimbursement. Technically, the loss isn’t “sustained” until this time—which could be the year following the casualty event or even later.
You must reduce the amount of your claimed casualty loss by any insurance recovery you receive or reasonably expect to receive, even if it hasn’t yet been paid.
- If it later turns out that you receive less insurance monies than you expected, you can deduct the amount the following year.
- If you receive more insurance monies than you expected and therefore claimed a casualty loss that is too large, you include the extra amount as income for the year it is received.
Limits on Casualty Loss Deduction
The tax code sets limits on how much of your uninsured losses you may deduct as a casualty loss. There are two sets of loss limitation rules on how much you can deduct:
- General casualty loss limitation rule
- Special rules for qualified disasters
General Casualty Loss Limitation Rule
The general rule is that you may take the casualty loss deduction only if you itemize your deductions on IRS Schedule A. To benefit from itemizing, your deductible casualty loss and other personal deductions (such as mortgage interest, real estate taxes, and medical expenses) should exceed the standard deduction.
In addition, you may deduct only the amount of the loss that exceeds 10 percent of your adjusted gross income (AGI) for the year. This greatly limits or eliminates many casualty loss deductions. The higher your income, the less you can deduct.
You must also subtract $100 from each casualty or theft you suffered during the year. This reduction applies to each total casualty loss. It does not matter how many pieces of property are involved in the event; only a single $100 reduction applies.
Example. You suffer a $20,000 casualty loss from a federal disaster and have $100,000 in AGI. You may deduct only that portion of the loss that exceeds $10,000 (10 percent x $100,000 = $10,000) minus $100. Your deduction is therefore limited to $9,900 ($20,000 – $10,000 – $100).
Special Rules for Qualified Disasters
Lawmakers exempted from the general casualty loss limitation rule most federally declared disasters occurring in 2018 through 2025, making it much easier for victims of these disasters to deduct their losses. For taxpayers who suffer uninsured losses due to a “qualified disaster”:
- There is no 10 percent of AGI threshold.
- The $100 floor is increased to $500.
- The casualty loss deduction can be claimed without itemizing.
- If a taxpayer does not itemize, their standard deduction is increased by the amount of their net disaster losses.
Definition of Qualified Disaster Expanded
Thanks to the Federal Disaster Relief Act of 2023, which was enacted by Congress in December 2024, the definition of qualified disaster has been greatly expanded.
Qualified disasters now include all federal major disasters declared by the President between January 1, 2020 and February 10, 2025. However, such disasters must have an “incident period” (the time they began) during December 28, 2019 through December 12, 2024, and they must have ended no later than January 11, 2025.
Amended Returns. The retroactive declaration of major disasters means that many disaster victims may need to file amended returns to claim additional tax refunds. Public Law 118-148 extends the statute of limitations until December 12, 2025, for affected taxpayers who would have otherwise been barred by the original deadline.
Additionally, Public Law 118-148 designates payments related to the East Palestine train derailment as qualified disaster relief payments under IRC §139(b). This classification ensures that compensation received for losses, damages, property value declines, closing costs, and related inconveniences is excluded from taxable income.
Eligible payments must come from a federal, state, or local government agency, Norfolk Southern Railway, or its subsidiaries, insurers, or agents. This provision specifically applies to the train derailment that occurred in East Palestine, Ohio, on February 3, 2023.
Qualified disaster losses also include
- disaster losses sustained from January 1, 2018, through February 18, 2020, due to a federally declared major disaster,12 and
- disaster losses sustained in 2017 from Hurricane Harvey, Irma, or Maria, and in the California wildfires in 2017 and January 2018.
When you add all these qualified disaster periods together, they cover most of the time between January 1, 2018, through January 11, 2025.
Unfortunately, it appears that victims of the recent Los Angeles wildfires will not benefit from the Federal Disaster Relief Act of 2023. The IRS has interpreted the Act to apply only to disasters beginning no later than December 12, 2024 and the Los Angeles wildfires began on January 7, 2025. Congress will have to act to extend these benefits to the Los Angeles wildfire victims.
Note, however, that qualified disasters include only major disasters as declared by the president. They don’t include emergency declarations. (Good news: Most disasters are declared major disasters.)
How to Calculate Casualty Losses
You calculate the deductible amount of a casualty loss by
The adjusted basis is ordinarily the property’s original cost plus the cost of permanent improvements. There are various ways to figure the decline in FMV, as discussed below.
Example. A fire that damaged Alice’s home was declared a major federal disaster. The home (not counting the land) cost $500,000, which is her adjusted basis. The home’s decline in value was $50,000; $40,000 of the damage was covered by insurance. Her casualty loss is $9,500 ($10,000 – $500).
You can use IRS Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) to calculate your losses.
Figuring Decline in FMV
Determining the decline of a property’s FMV due to a disaster can be the most complicated part of the casualty loss equation. There are two main ways to determine by how much a disaster reduced your property’s FMV: appraisal or cost of repair. Several optional methods are available for each approach, subject to certain limitations.
An appraisal by a qualified appraiser is the gold standard for determining the decline in FMV due to a disaster. Appraisals can be expensive. Unfortunately, the cost of an appraisal is not part of a casualty loss and is not deductible as a miscellaneous itemized deduction from 2018 through 2025.
Instead of an appraisal, you can use the second option: the cost of repairing the property. But this is acceptable only if
- the repairs are necessary to bring the property back to its condition before the casualty,
- the amount spent for repairs is not excessive,
- the repairs take care of the damage only, and
- the value of the property after the repairs is not greater than before the casualty.
The general rule is to complete the repairs before claiming your casualty loss.But there are exceptions. You can choose an optional safe-harbor method.
Optional Safe-Harbor Methods to Figure Decline in FMV
There are several optional safe-harbor methods to figure out the decline in FMV due to a casualty that occurred in 2018 or later. If you use one of these, the IRS cannot question your valuation. You will likely find the optional methods handy for smaller losses.
If a casualty damages your home (not including a condo or mobile home), you may use the following optional methods:
- De minimis method. Here, you (yep, you) prepare a written good-faith estimate of the cost of repairs up to $5,000. You must keep documentation showing how you estimated the loss. You don’t need to complete the repairs before you claim your loss.
- Insurance method. You use the estimated loss amount in reports prepared by your homeowners’ or flood insurance company.
- Contractor safe harbor. You use the contract price for repairs prepared by a licensed contractor. You must enter into a binding contract with the contractor to perform the repairs—but you don’t need to complete the repairs before you deduct your loss. This safe harbor is only for property located in federal disaster areas.
- Disaster loan appraisal. Use an appraisal prepared for you to obtain a loan from federal funds or a federal loan guarantee. This method is only for property located in federal disaster areas.
If personal belongings are damaged, you may use one of the following:
- De minimis method. Here, you make a good-faith estimate of the decrease in fair market value of up to $5,000. You must keep records describing your personal belongings and your method for estimating your loss.
- Replacement cost. With this method, you determine the cost to replace your belongings with new ones, and then reduce that amount by 10 percent for each year you owned the belongings (up to nine years). If you use this method, you must use it for all of your personal belongings.
When to Claim Casualty Losses
You claim a casualty loss by filing IRS Form 4684, Casualties and Thefts, with your return. You may always claim a casualty loss in the year you suffer it, but it can be later if you’re waiting on an insurance claim.
When you suffer a casualty loss caused by a federally declared disaster that occurred in an area warranting public or individual government assistance (or both), you can also claim the loss deduction on your prior year’s return. Virtually all federally declared disasters qualify for public assistance (and many qualify for individual assistance as well). You can check to make sure by reading the disaster declaration information available at the FEMA website.
Claiming the loss for the past year can provide a quick tax refund since you’ll get back part (or even all) of the tax you paid for the prior year. Also, if your loss is subject to the 10 percent of AGI limitation, you’ll have a larger deduction if your AGI for the prior year is lower than for the year of the casualty.
You must elect to claim the loss for the preceding year on Form 4684. Make the election with your original or amended return for the earlier year. You have until October 15 to decide whether to file the election for the prior year.
Losses Not Due to Federally Declared Disasters
Uninsured losses to non-business property you incur due to events that are not federally declared disasters are not deductible. For example, you can’t deduct uninsured losses due to an accidental house fire that was not caused by a disaster event.
Key point. You should keep track of such losses because you may deduct them from any casualty gains you recover.
You have a casualty gain when the insurance proceeds you receive for a loss exceed the adjusted basis of the property. Casualty gains are taxable. That’s where you can use those non-federally declared casualty losses for your benefit.
Takeaways
Here are five things to know from this article:
