A Closer Look at Casualty Losses
The IRS defines “casualty loss” as a loss that results from “the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption.” A casualty does not include normal wear and tear or progressive deterioration. For comprehensive information on calculating the amount of your casualty loss, whether for personal-use property or business/income-producing property, see the IRS’ Topic 515 – Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas).
Casualty Loss After 2017
The sweeping tax reform legislation passed in late 2017 impacted a variety of areas, and casualty loss is no exception. The Tax Cuts and Jobs Act (TCJA) limited the deduction for personal casualty losses to those attributable to federally declared disasters.
In December of the same year, the IRS issued Revenue Procedure 2018-08, which detailed seven safe harbor methods for determining personal casualty or theft losses. These are helpful because they provide specific instructions for calculating the deductible amount of a loss. For more information on the new safe harbor methods, check out this article from the CPA Journal.
Calculating and Reporting Casualty Losses
Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return. A few key points related to this topic include:
- While casualty losses are generally deducted in the year that the casualty occurred, in the case of a federally declared disaster that occurred in an area warranting assistance, you have the option of treating the casualty loss as having occurred in the preceding tax year.
- Your casualty loss deduction must be reduced by the salvage value of your property, as well as by any insurance reimbursement received.
- If your property is personal use property or isn’t completely destroyed, the amount of your casualty loss is the lesser of the adjusted basis of your property or the decrease in fair market value of your property as a result of the casualty.
- If you have a personal casualty capital gain for the tax year, you may be able to deduct the portion of the personal casualty loss not attributed to a federally declared disaster area to the extent the loss doesn’t exceed the personal gain.
Casualty losses should be reported on Form 4684, Casualties and Thefts (Section A for personal-use property, Section B for business or income-producing property) and claimed as an itemized deduction on Form 1040, Schedule A. For property held by you for personal use, you must subtract $100 from each casualty or theft event that occurred during the year, after you’ve subtracted any salvage value and insurance or other reimbursement. You then need to add up all those amounts and subtract 10% of your adjusted gross income from the total to calculate your allowable casualty and theft losses for the year. This is still reported on Schedule A. In the case of your loss deduction exceeding your income, you may have a net operating loss—refer to Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
Reconstructing records is a key step for those facing property damage as a result of a casualty loss such as a natural disaster. For tax records, the IRS offers a free return transcript tool called Get Transcript, and also expedites processing and waives the normal user fees for those who prefer to request their transcripts by phone or mail. For a comprehensive list of what other records to pursue, and tips on doing so, visit the IRS’ Reconstructing Records After a Natural Disaster or Casualty Loss page.
The DeBoer, Baumann & Company, P.L.C. team extends its deepest sympathies to everyone affected by natural disasters and other casualty losses. We encourage you to reach out to your DBC advisor with any and all queries you might have as to how to undertake this step of recovery from disaster.